Question

When a monopolist changes from charging a single price to perfect price discrimination, it
a. Reduces the quantity produced and maintains profits at a fixed level.
b. Reduces the firm’s profits and output.
c. Increases consumer surplus and decreases producer surplus.
d. Increases profits and eliminates consumer surplus

Answer 1

When a monopolist changes from charging a single price to perfect price discrimination, it

a. Reduces the quantity produced and maintains profits at a fixed level.

b. Reduces the firm’s profits and output.

c. Increases consumer surplus and decreases producer surplus.

d. Increases profits and eliminates consumer surplus.

Answer: d. Increases profits and eliminates consumer surplus.

Perfect price discrimination also called as first order price discrimination. In perfect price discrimination, the monopolist charges a different price for every unit consumed. The monopolist will be able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surpluses. In the perfect price discrimination the consumers’ surplus will be zero and the monopolist can maximize the profit. In this condition the monopolist extracts all the consumer surplus and earns the firms the highest possible profits.