Question

 6. Price discrimination and welfare

 Barefeet is a monopolist that produces Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue curves Barefeet faces, as well as its marginal cost curve, which is constant at $40 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that the firm's marginal cost (MC) is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve.

 First, suppose that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay for them.

 On the following graph, use the grey point (star symbol) to indicate the profit-maximizing price and quantity. Next, use the purple rectangle (diamond symbols) to shade in the Profit if Barefeet profit maximizes. Then, use the green triangle (triangle symbols) to shade in the consumer surplus (CS) if Barefeet profit maximizes. Finally, use the tan triangle (dash symbols) to shade in the deadweight loss in this market.

 Now, suppose that Barefeet can practice first-degree price discrimination-that is, it knows each consumer's willingness to pay for each pair of Ooh boots and is able to charge each consumer that amount.

 On the following graph, use the grey point (star symbol) to indicate the quantity sold under first-degree price discrimination by placing it in the appropriate place on the demand curve.

 Based on the previous graph, complete the following table for the case when Barefeet can price discriminate:

 Consider the welfare effects when the industry operates under a monopoly and cannot price discriminate versus when it can price discriminate. Under which market conditions is total surplus maximized? Check all that apply.

•  Under first-degree price discrimination

•  Under neither first-degree price discrimination nor a single-price monopoly

•  Under a single-price monopoly

Answer 1

Ans)

Consumer surplus = 1/2×base ×height = 1/2× 6×(100-70) = $9000

Profit = length × breadth = 6×(70-40) = $18,000

Deadweightloss = 1/2× base × height = 1/2×(70-40)×(12-6) = $9,000

Profit under price discrimination = 1/2× base × height = 1/2× (100-40)×1200 = $36,000

So we see that profit under price discrimination is more. Under first degree total surplus is maximised. However there is no consumer surplus.

Option a.