Question

13.Suppose a monopoly's inverse demand curve is P = 100 -Q, it produces a product with a constant marginal cost of 10, and it has no fixed costs. How much more or less is the deadweight loss if the monopoly can practice perfect price discrimination compared to it practicing uniform pricing? ___________

Answer 1

A uniform pricing monopolist produces at MR=MC

MR=100-2Q .......... An MR curve double sloped than a linear inverse demand curve

MC=10

equating MR=MC to find the output

100-2Q=10

2Q=90

Q=45

P=100-Q=100-45=55

the firm produces 45 units and charges price of 55

if the firm is producing at the perfect price discriminating output which is the same as social optimum level output as it is produced at MC=P then

P=MC

100-Q=10

Q=90

the output is 90 units

DWL under uniform price monopoly=0.5*(P-MC)*(change in quantity)

=0.5*(55-10)*90

=2025

the monopolist reduces the deadweight loss by $2025

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