Suppose a given market is served by a monopoly with constant marginal cost, c. We know...

Suppose a given market is served by a monopoly with constant marginal cost, c. We know that 1st degree price discrimination increases total surplus compared to the outcome where the monopoly charges a single price, pm. One of the criticisms of this result is that price discrimination can be costly to the monopoly, e.g., because it must gather information on willingness-to-pay. Suppose the marginal cost with price discrimination rises to c' > c. Explain with words and a diagram whether total surplus is still higher with 1st degree price discrimination than a single price. What areas on your diagram must be compared?

Expert Solution

Suppose a given market is served by a monopoly with constant marginal cost, c. We know that 1st degree price discrimination increases total surplus compared to the outcome where the monopoly charges a single price, pm. One of the criticisms of this result is that price discrimination can be costly to the monopoly, e.g., because it must gather information on willingness-to-pay. Suppose the marginal cost with price discrimination rises to c' > c. Explain with words and a diagram whether total surplus is still higher with 1st degree price discrimination than a single price. What areas on your diagram must be compared?

Answer: total surplus is higher in the case of 1st price discrimination than normal single price because in the case of 1st degree price discrimination monopoly charges according to the willingness of the consumers so for different consumers there will be different prices as price increases consumers surplus decreases and this will leads to producers surplus and if there increment in the marginal cost than there will be no effect on quantity as well as price so monopoly will earn extra surplus money in the case of 1st degree price discrimination. Diagram for the above answer given below

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Rahul Sunny answered 7 months ago

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