Question

1. Suppose that a monopolist engages in first-degree price discrimination. Which of the following statements is true?

a. Consumers receives all the economic surplus.

b. The economic surplus is equally distributed between the consumers and the monopolist.

c. The monopolist receives all the economic surplus.

d. Total surplus is not maximised ( there is a deadweight loss)

e. None of these.

2.

A monopolist has no fixed costs and a constant marginal cost equal to $4 per unit.

Suppose that the demand of its product is given by
P = 12 - 2Q, and its marginal revenue is given by MR = 12 - 4Q.

If the monopolist cannot price discriminate, consumer surplus will be _____, while if it could perfectly price discriminate, consumer surplus would be _____.

Answer 1

1. The correct option is c. By practicing first degree price discrimination, the monopolist charges the consumers exactly the price they are willing to pay, thereby capturing all the consumer surplus.

2. The monopolist produces at a point where marginal cost is equal to the marginal revenue.

12 - 4Q = 4

Q = 2

From the demand equation,

P = 12 - 2×2 = 8

When Q =0, P =12 which is the y intercept of the demand curve.

Consumer surplus = 1/2 × (12 - 8) × 2 = 4

When there is no price discrimination, consumer surplus is 4, when there is price discrimination, it is zero.