Question

7. Price discrimination and welfare

Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $40 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Barefeet's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve.

First, suppose that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay.

On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the black points (plus symbol) to shade the deadweight loss in this market without price discrimination. (Note: If you decide that consumer surplus, profit, or deadweight loss equals zero, indicate this by leaving that element in its original position on the palette.)

Monopoly OutcomeConsumer SurplusProfitDeadweight Loss0204060801001201401601802001009080706050403020100PRICE (Dollars per pair of Ooh boots)QUANTITY (Pairs of boots)DemandMC = ATCMR

Now, suppose that Barefeet can practice perfect price discrimination—that is, it knows each consumer's willingness to pay for each pair of Ooh boots and is able to charge each consumer that amount.

On the following graph, use the black point (plus symbol) to indicate the profit-maximizing quantity sold and the lowest price at which the firm sells its boots. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the black points (plus symbol) to shade the deadweight loss in this market with perfect price discrimination. (Note: If you decide that consumer surplus, profit, or deadweight loss equals zero, indicate this by leaving that element in its original position on the palette.)

Monopoly OutcomeProfitConsumer SurplusDeadweight Loss0204060801001201401601802001009080706050403020100PRICE (Dollars per pair of Ooh boots)QUANTITY (Pairs of boots)DemandMC = ATC

Consider the welfare effects when the industry operates under a monopoly and cannot price discriminate versus when it can price discriminate.

Complete the following table by indicating under which market conditions each of the statements is true. (Note: If the statement isn't true for either single-price monopolies or perfect price discrimination, leave the entire row unchecked.) Check all that apply.

Statement	Single-price Monopoly	Perfect Price Discrimination
Barefeet produces a quantity more than the efficient quantity of Ooh boots.
There is deadweight loss associated with the profit-maximizing output.
Total surplus is maximized.

Answer 1

a) DWL - Single Price Monopoly

b) Total surplus is maximised under Perfect Price Discrimination

c) Single Price Monopoly