Question

Suppose that a monopolist faces the following costs and demand for its product:

Quantity Total Cost Marginal Price Cost Total Revenue Marginal Revenue 0 $10 $11 1 $11 $10 2 $13 $9 3 $16 $8 4 $20 $7 5 $25 $6 6 $31 $5 7 $38 $4

A. Complete the table above. (Draw your table on a piece of paper, take a picture with your phone and then attach the image to your answer here.)

B. Given that the monopolist wants to maximise profits, what price will it charge, and how many units will it produce?

C. Suppose that the monopolist is able to engage in first degree (perfect) price discrimination. How many units will it produce?

D. Using this monopolist as an example, explain how price discrimination by a monopolist affects profits, total surplus and consumer surplus.

Answer 1

Table

Q	TC	MC	P	TR	MR
0	10	-	11	-	-
1	11	1	10	10	10
2	13	2	9	18	8
3	16	3	8	24	6
4	20	4	7	28	4
5	25	5	6	30	2
6	31	6	5	30	0
7	38	7	4	28	-2

Graph

Monopoly 11 10 9 8 7 6 LO Price, MR, MC demand MC MR 3 N 1 0 .ܚ. 2 3 4 5 9 -1 ....... Quantity -2

B) at profit Maximizing eqm

MR = MC

So when Q= 4, MR= MC = 4

so P*= 7, Q*= 4

c) in first degree price DISCRIMINATION, Monopolist sells each consumer at his willingness to pay,

So it extracts entire Consumer Surplus , so

Sells the good,till P = MC

So units produced= 5.5

If while number, then 5 units

D) price DISCRIMINATION ( if first degree)

Then PS rises, TS rises, CS falls .