Question

A monopoly has a marginal cost of zero and faces two groups of consumers. At first, the monopoly could not prevent resale, so it maximized its profit by charging everyone the same price,p = $5. No one from the first group chose to purchase. Now the monopoly can prevent resale, so it decides to price discriminate. Will total output expand? Why or why not? What happens to profit and consumer surplus?

Answer 1

For charging different price from two consumer groups the monopoly has no acquired the required conditions

• Prevention of resale
• segregation of market and possession market power

Yes. See that when price was $5, one group of consumer was not buying. The monopoly has to see the demand function of this group. It is certain that the maximum willingness to pay for this group is lower than $5 and that is why it is not buying at P = $5. Lowering a price that is below the maximum willingness to pay for this group would increase sales revenue as well as profits, because cost is zero. Hence revenue maximization implies profit maximization.

The total output is expected to expand as the group will buy. Perhaps the previous group will buiy more when the price is reduced. Now consumer surplus (area between demand line and price line) is expected to increase as price is reduced for both consumers while quantity purchased is increased.