Question

This discussion focuses on how a price-discriminating monopolist can earn even higher profits than a monopolist charging a single price. The example uses an imaginary time machine to look at monopoly profits and consumer surplus.  

The demand for time travel is shown below:

“Steve” wants to travel back in time to see the dinosaurs; he is willing to pay as much as $200 to use the time machine.

“Joyce” wants to relive this entire semester; she is willing to pay up to $150 to use the time machine.

“Chip” can’t wait for the semester to end; he is willing to pay as much as $125 to use the time machine.

“Dawn” just wants to get through this class period; she is willing to pay up to $100 to use the time machine.

The demand curve for time travel is:

                 Price                   Quantity

                 $200                       1

                  150                       2

                  125                       3

                  100                       4

For simplicity, let the marginal cost of time travel be constant at $100. What would be the equilibrium quantity for a perfectly competitive market? What quantity would be chosen by a monopolist? What advantage would the monopolist experience using perfect price discrimination? What is your take-away from this analysis?

Answer 1

Price	Quantity	TR	MR
200	1	200	-
150	2	300	100
125	3	375	75
100	4	400	25

Given, MC = 100.

In a perfectly competitive market, equilibrium is attained at a point where P = MC.

Thus, equilibrium price = $100 and equilibrium quantity = 4 units.

Under a monopoly, equilibrium is attained at a point where MR = MC.

Thus, equilibrium price = $150 and equilibrium quantity = 2 units.

If the monopolist indulges in perfect price discrimination, he will be able to extract all the consumer surplus by charging different prices from different consumers (their marginal willingness to pay) and thus would increase his profits.