Question

Consider a monopolist whose total cost function is TC = 20 + 10Q + 0.3Q2 and whose marginal cost function is MC = 10 + 0.6Q. The demand function for the firm's good is P = 120 - 0.2Q. The firm optimizes by producing the level of output that maximizes profit or minimizes loss. If the firm is able to practice perfect (or first degree) price discrimination then the firm will:

1) Earn higher profits compared to a situation with uniform pricing
2) Earn lower profits compared to a situation with uniform pricing
3) Earn the same profits as a situation with uniform pricing
4) Cannot be determined without additional information

Answer 1

With perfect price discrimination, a monopolist produces where marginal cost equals the demand curve, capturing all the consumer surplus. As a result, the monopolist will earn higher profits compared to uniform pricing.

Step-by-step explanation:

The student's question pertains to how a monopolist determines the level of output when able to practice perfect price discrimination and the impact this has on profits compared to uniform pricing. Perfect price discrimination allows a monopolist to charge each consumer the maximum price they are willing to pay, resulting in the monopolist capturing the entire consumer surplus as profit. With perfect price discrimination, the monopoly produces where marginal cost (MC) is equal to the demand curve (because marginal revenue MR for each unit equals the price on the demand curve), which is the same output level that would be produced by a perfectly competitive industry. Therefore, the monopolist would earn higher profits compared to a situation with uniform pricing, as it would be earning the maximum possible profits without any consumer surplus left.

Answering the student's multiple-choice question, with perfect (or first degree) price discrimination, the firm will: 1) Earn higher profits compared to a situation with uniform pricing.