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In: Economics

Assume now that the market in Question 2 is served by a profit maximizing monopoly. The...

Assume now that the market in Question 2 is served by a profit maximizing monopoly. The firm is sufficiently large that its marginal cost is equal to the market supply curve in Scenario 3a. Therefore, market demand is still P = 150 - .05Q and the monopoly firm’s MC = 0.45Q + 10. The monopoly has marginal revenue MR = 150 - Q. The monopoly is a large well run firm with a short run average total cost of ATC = 0.25Q.

Suppose the monopolist perfectly price discriminates. What will be its producer surplus?

a.

$19,600.00

b.

$10,027.36

c.

$9025.00

d.

$18,050.00

Expert Solution

The correct option would be

a. $19600

In perfect price discrimination, the firm produces competitive market quantity, meaning at where the MC is equal to demand price, but takes the entire surplus, by charging different prices for each consumer. The demand price is given as . The quantity produced would be where or or . The producer surplus would be the total surplus. It would be the area of triangle below demand curve and above MC/supply curve. The base of the triangel would be the difference between highest demand price and lowest MC price. At Q=0, the highest demand price is , and the lowest MC price is . The height of the triangle would be the amount of quantity supplied. Hence, the PS would be or or dollars. The graph is as below.

The producer surplus would be the area of triangle ABE, in which base is AB=140, which is the difference between highest demand price and lowest supply/MC price, and height is the quantity supplied, which is at point E.

Rahul Sunny answered 2 years ago

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