condition does not hold for monopolies, even if they are perfectly price-discriminating – because firms in the long run do not need to be at the minimum of the ATC curve. Nor does it hold for monopolistic competition because in such an industry, MR is not equal to P. 1.15 P = MC. This is the “efficiency” condition – i.e. it means we are producing where consumers’ willingness to pay (P) equals producers willingness to supply (MC). This condition holds in perfectly competitive industries and in monopolies with perfect price discrimination in SR and LR. 1.16
1.17 2. 1.18 1.19 1.20 1.21 1.22 1.23 The monopolist’s profit is X+Y+Z in this case. The change in the monopolist’s profit from price discrimination is Y+Z, and the change in total surplus is from price discrimination is Z. 1.24 1.25 If the monopolist can perfectly price discriminate, it can charge each consumer their willingness to pay (so monopolist looks at D curve, sees what it can charge for the first unit it sells, and charges that, then looks at the price that it can sell the second unit for, on the D curve, and sells it for that… so its marginal revenue from the second unit will be the price of the second unit and so on and so forth), so the demand curve is also the marginal revenue curve. And we know firms maximize profits by producing where MR = MC. If the demand curve is the MR curve for a monopolist who can perfectly price discriminate, then the monopolist will produce the quantity determined by intersection of MC and the demand curve. And we know that PS is the difference between the price received and the firm’s willingness to sell. For the first unit, we look at the demand curve to see the price received, and the MC curve gives us the willingness to supply, so that vertical distance is the PS from the first unit… so adding up across all quantities, the PS if the monopolist can perfectly price discriminate is the area between the demand curve and between MC. The monopolist’s profit, if it can perfectly price discriminate, rises because it can extract each consumer’s maximum willingness to pay. And surplus rises with perfect price discrimination because we get to Q efficient (though note consumers are not as happy with this outcome as they would be if this were a perfectly competitive industry and THEY were capturing all the social surplus…) 1.26 1.27 The monopolist will pay the fixed cost to be allowed to discriminate if Y+Z > C.
1.28 1.29 The gain in producer surplus from price discriminating is Y+Z, so as long as it doesn’t have to pay more than that for the privilege of price-discriminating, it will be willing to do so. 1.30 1.31 A benevolent social planner, who cares about total surplus, will agree to allow the monopolist to price discriminate as long as it pays the fixed cost if Z>C.
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- Fall '11