Question

Handwrite in text plz not in pic since its hard to read from and plz dont copy answers that were answered before least 2-3 paragraphs

3. George has a monopoly on burrito sales in a small town in Kansas. The burritos cost him a constant $5 each to produce. He faces following demand schedule for his product:

Price	Quantity Demanded
$30	0
$25	1
$20	2
$15	3
$10	4
$5	5
$0	6

• Under normal monopoly conditions, how many burritos should he produce, what price should he charge, and how much profit can he expect to make?
  • Draw a graph under these assumptions showing (and calculating) producer surplus, consumer surplus, economic surplus and deadweight loss.
• If George was able to engage in perfect price discrimination, how many burritos would he produce, what would his total revenue be, and how much profit would he earn?
  • Draw a graph under these assumptions showing (and calculating) producer surplus, consumer surplus, economic surplus and deadweight loss.
• Is society better off by allowing George to perfectly price discriminate? Defend your answer.

Answer 1

P	Q	TR = P*Q	MR	MC
30	0	0	-	5
25	1	25	25	5
20	2	40	15	5
15	3	45	5	5
10	4	40	-5	5
5	5	25	-15	5
0	6	0	-25	5

MRn = TRn - TRn-1

where n = #of quantity produced

Above data is shown in the graph below:

MONOPOLY

Under monopoly conditions, equilibrium occurs at a point where MR = MC. In the table, this occurs where Quantity Produced = 3 and Price Charged = $15

At this price, Monopoly Gain = area of region BCDE

= 3* (15-5) = $30

Consumer Surplus (CS) = area of triangle ABC

= 1/2 * (30 - 15) * 3

= $22.5

Producer Surplus (PS) = area of region BCDE = Monopoly Gain

= 3* (15-5) = $30

Economic Surplus = CS + PS = 22.5 + 30 = $52.5

Deadweight Loss (DWL) = area of triangle CDF

= 1/2 * (5 - 3) * (10 - 5)

= $5

PERFECT PRICE DISCRIMINATION

Under perfect price discrimination, The equilibrium occurs at a point where the MC curve intersects the demand curve. Under this situation, the MR curve becomes the AR curve. In the graph, this occurs at point F where Quantity Demanded = 5 and the price charged = $5

If burritos is able to perfectly price discriminate, then all the consumer surplus will be extracted from the market. This surplus will also cover the producer surplus and DWL that occurred in case of monopoly.

PS = CS = Economic Surplus = area of region ABC

= 1/2 (5) * (5)

= $12.5

Deadweight Loss = $0

Is society better off by allowing George to perfectly price discriminate?

Yes. Because in case of perfectly price discrimination, there is no DWL. DWL is a social cost on society. Also, price charged to each consumer is much lower than what was charged under Monopoly conditions. So, consumers are better off.

Monopoly Price = $15

Perfect discrimination price = $5