Question

a. Fill the following table:  

Number of Earning	TVC	MC	AVC	TFC	TC	AFC	ATC
0					100
1		50
2							95
3			46.67
4					300
5	270

b. Explain how price discrimination converts consumer surplus into economic profit.

Answer 1

Answer

Using the following formulae, the table can be filled:

AVC = TVC/ Total Units

AC = TC/ Total units

MC = TVC_n - TVC_n-1

ATC= TC / Total Units

AFC = FC/ Total Units

A)

Number of Earning	TVC	MC	AVC	TFC	TC	AFC	ATC
0	0	-	-	100	100	-	-
1	50	50	50	100	150	100	150
2	90	40	45	100	190	50	95
3	140	50	46.67	100	240	33.33	80
4	200	60	50	100	300	25	75
5	270	70	54	100	370	20	74

B)

First degree or perfect price discrimination is when a firm charges each consumer their maximum willingness to pay, which is reflected by the demand curve. As in other cases, it is optimal for the firm to choose its output at the point where MR=MC. But if a firm can charge each person his/her maximum willingness to pay, then MR = price as found on the demand curve. So it would be willing to sell its products up to the point where the MC curve crosses the demand curve, i.e. where MC = price = MR. This means that not only will the firm would be willing to sell more units than it did as a single priced monopolist, but it will also be allocatively efficient because price equals marginal cost at the last unit. However, each consumer is now paying her maximum willingness to pay, and therefore receives no consumer surplus. So although the output level is allocatively efficient and the same as perfect competition would obtain, the distribution of economic surplus is quite different – the firm extracts all of the surplus!