Question

Suppose hot air knows each consumer’s willingness to pay and implements perfect price discrimination. Calculate the corresponding output quantity, consumer surplus, producer surplus, and deadweight loss.

Answer 1

In perfect price discrimination, the monopolist charges each buyer their maximum willingness to pay, resulting in no consumer surplus. The monopolist produces the same quantity as a perfectly competitive industry and earns maximum profits. There is no deadweight loss.

Step-by-step explanation:

In the scenario of perfect price discrimination, the monopolist knows each consumer's willingness to pay and charges them exactly that amount. As a result, the monopolist would produce the same output quantity as a perfectly competitive industry. However, there would be no consumer surplus because each buyer is paying their maximum willingness to pay. The monopolist would earn the maximum possible profits, which would be equal to the sum of consumer surplus and producer surplus.

Since consumer surplus is zero, producer surplus would be the total market revenue earned by the monopolist. Deadweight loss, which represents the inefficiency in the market, would also be zero because the monopolist is producing at the socially optimal quantity.