3. Price discrimination and welfare Suppose Barefeet is a monopolist that produc
ID: 1156178 • Letter: 3
Question
3. 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 $20 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.)Explanation / Answer
Case 1: Barefeet cannot price discriminate
In this case, the monopolist will operate at a point where the MR = MC i.e. P = 55 and Q = 280.
Consumer surplus = 1/2(90-55)(720-280) = 7700
and producer surplus = 1/2(55)(280) = 7700.
Deadweight loss = 1/2(560-280)(55-20) = 4900.
Case 2: It can price discriminate
When barefeet can price discriminate, it will produce at a point where P = MC i.e. P = 20 and Q = 560.
Consumer surplus = 0
producer surplus = 1/2(90-20)(560) = 19600
and deadweight loss = 0.
Statements:
a) Not true for either single price monopoly or perfect price discrimination.
b) True for perfect price discrimination - there is no deadweight loss associated with profit maximizing output.
c) Total surplus is not maximized - True for single price monopoly.
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