Final answer:
Under perfect price discrimination, a monopolist can charge each consumer the highest price they are willing to pay, leading to a larger output similar to that of a competitive market and higher profits due to the capture of all consumer surplus. Thus, the correct option is b. larger its output and the higher its profits.
Step-by-step explanation:
When considering the effects of perfect price discrimination on a monopoly, it is essential to understand the implications for both the monopoly's output and its profits. Under perfect price discrimination, a monopolist can charge each buyer the maximum price that the buyer is willing to pay, effectively capturing all consumer surplus as profit. This ability transforms the monopolist's behavior to resemble that of a perfectly competitive market in terms of output.
As opposed to charging a single price for all units sold, the monopolist will adjust prices to sell to buyers with varying willingness to pay, thus increasing output. Therefore, the monopolist's output increases, and because they are extracting the maximum willingness to pay from each consumer, profits are also maximized. No consumer surplus exists in this scenario, because each consumer is paying a price equivalent to their valuation of the product.
Comparison with Competitive Markets
In a perfectly competitive market, firms produce where marginal revenue equals marginal cost, leading to the optimal output for the market and some consumer surplus. A perfectly price-discriminating monopolist, though facing no competition, will also produce where marginal revenue equals marginal cost, similarly leading to an output level that is identical to the one in a competitive market. The key difference, however, is the distribution of surplus; all surplus becomes producer surplus under perfect price discrimination. By analyzing the provided information and understanding the dynamics of a monopolistic market capable of perfect price discrimination, we conclude that the monopolist would produce a larger output and enjoy higher profits. Therefore, the correct option is b. larger its output and the higher its profits.