Question

Under first-degree price discrimination, a monopolist produces the efficient output. Is this true or false? Explain elaborately using an appropriate diagram.

Answer 1

Solution:

The given statement is true that under first-degree price discrimination, a monopolist produces the efficient output. This is because at first degree price, each consumer's maximum willingness to pay is charged by the seller (thereby discriminating perfectly, and so it is also called as perfect discrimination). This way by charging each consumer differently, exactly their maximum willingness to pay, the seller is able to extract the entire consumer surplus, ending up converting it into own's producer surplus. The output is produced until the last level of price charge or minimum level of price charged equals seller's marginal cost (of course the seller won't make a sell to anyone willing to pay maximum of amount which is lower than seller's marginal cost, as then additional revenue generated is lower than additional cost incurred).

Since, under perfect competition, where efficient output level is produced where price equals marginal cost, in same way with output level at point where MC intersects the demand curve, first-degree price discrimination makes monopolist to produce at efficient point.

Required graph for first-degree price discrimination is as follows: Q* denoting the efficient output level