monopolist’s production costs are simply proportional to output so that average total cost and marginal cost are constant and equal to each other. a. Draw the cost, demand, and marginal-revenue curves for the monopolist. Show the price the monopolist would charge without price discrimination. b. In your diagram, mark the area equal to the monopolist’s profit and call it X. Mark the area equal to consumer surplus and call it Y. Mark the area equal to the deadweight loss and call it Z. c. Now suppose that the monopolist can perfectly price discriminate. What is the monopolist’s profit?
Pietro 6 The monopolist’s profit is X + Y + Z. d. What is the change in the monopolist’s profit from price discrimination? What is the change in total surplus from price discrimination? Which change is larger? Explain. The monopolist’s profit goes up by the areas Y and Z because he is able to charge each customer exactly how much she values the product. Total surplus increases by the area Z, but now all surplus belongs to the producer (smaller change). e. Now suppose that there is some cost of price discrimination. To model this cost, let’s assume that the monopolist has to pay a fixed cost C to price discriminate. How would a monopolist make the decision whether to pay the fixed cost? The monopolist should choose to pay C to price discriminate if C is less than Z. f. How would a benevolent social planner, who cares about total surplus, decide whether the monopolist should price discriminate? The social planner would want the monopolist to price discriminate no matter what in order to eliminate deadweight loss and maximize total surplus. g. Compare your answers to parts (e) and (f). How does the monopolist’s incentive to price discriminate differ from the social planner’s? Is it possible that the monopolist will price discriminate even though it is not socially desirable? The monopolist wants to maximize his profits, while the social planner wants to maximize total surplus. Price discrimination may not be socially desirable if one is aiming for consumer surplus, but the monopolist will still do it.