3 many schemes for price discrimination involve some

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3) Many schemes for price discrimination involve some cost. Assume that a monopolist faces production costs that are simply proportional to output so that the 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. In your diagram mark the area equal to the monopolist’s profit and call it X. Mark the area equal to the consumer surplus and mark it Y. Mark the area equal to the deadweight loss and call it Z. b) Suppose the monopolist can perfectly price discriminate. What is the monopolist’s profit in terms of X, Y and Z? What is the change in welfare? c) Now suppose that price discrimination has some cost, C. Under what condition would price discrimination increase the social welfare compared to the social welfare under monopoly without price discrimination?
Answer:
Chapter 10 Problems and Applications Question 6 Answer: a. It is efficient to have different amounts of pollution reduction at different firms because the costs of reducing pollution differ across firms. If all firms were made to reduce pollution by the same amount, the costs would be low at some firms and prohibitive at others, imposing a greater burden overall.

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