Question

Assume a monopolist can prevent resale of its product and it has complete information about each one of its customers. Even though each customer has a different demand curve, the seller can identify each customer's demand curve before a purchase takes place. It faces the inverse market demand of P = 160 –10Q with marginal cost of MC = 10 + 5Q . Identify the type of price discrimination the monopolist should employ and explain why. Then complete this table:

Find:

Consumer Surplus

PS - Producer Surplus
TS- Total Surplus
DWL- Deadweightloss

Answer 1

The monopolist can identify each customer's demand curve and the product cannot be re-sold. Hence, he will practise First degree price discrimination or perfect price discrimination.

He understands how much each customer is willing to pay and he charges that amount to the particular customer. This will maximise his profit.

The monopolist will sell until P = MC.

He charges the maximum willingness to pay for each customer. Therefore, consumer surplus is 0

The producer surplus is the area shaded in blue colour.

The area = 0.5* (160-10) * 10 = 750

The producer surplus is 750

There is no deadweight loss in comparison to perfect competition, although the entire surplus is amassed by the producer.

Producer Surplus	750
Total Surplus	750
Dead weight loss	0

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