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Unformatted text preview: Professor Schuler Economics 101 Spring 2006 Quiz 2 Solutions a. This situation describes a monopoly, see Figure 1. The equilibrium industry output and price are given by Q m and P m , respectively. The suppliers profit is the region given by BDGH. The consumer surplus (CS) is the region given by ABH and producer surplus (PS) is the region given by BEFH. The deadweight loss is the region given by BCE. The total welfare of the economy is the sum of CS and PS. Figure 1: Part a 1 Professor Schuler Economics 101 Spring 2006 b. This situation describes third degree price discrimination, see Figure 2. This pricing policy differs from (a) because in here the monopolist is able to charge two different prices, one to each type of consumer. In (a), the monopolist had to charge the same price to all consumers. Third degree price discrimination is very beneficial to the supplier since it is able to shift even more welfare than in (a) away from consumer surplus to the suppliers profit (i.e. surplus). Of course, this is assuming the optimal prices the monopolist would want to charge...
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