Examine the figure PPV. The figure shows the demand and marginal revenue for a p
ID: 1201360 • Letter: E
Question
Examine the figure PPV. The figure shows the demand and marginal revenue for a pay-per-view football game from a cable TV company. Assume that the marginal cost and average cost are a constant $40. If the cable company practices perfect price discrimination, deadweight loss will be: $180. $100. $40. $0. Examine the figure PPV. The figure shows the demand and marginal revenue for a pay-per-view football game from a cable TV company. Assume that the marginal cost and average cost are a constant $40. If the cable company practices perfect price discrimination, producer surplus will be: $180. $100. $40. $0.Explanation / Answer
(7) $40
In perfect competition, Price = MC = $40 and at this price, output = 7
When demand curve is downward sloping, profit is maximized when MR = MC = $40
At this point, price = $70 and output = 3
Deadweight loss = (1/2) x difference in price x difference in output
= (1/2) x $(70 - 40) x (7 - 4)
= (1/2) x $30 x 3
= $45
The closest option is $40. The difference is because I cannot read the precise value of output when MR = MC = $40. Image is too small.
(11) $0
Under perfect price discrimination, the seller will charge a price equal to MC (= $40) and gain the entire consumer surplus. But the producer surplus, which is the area lying within supply curve (MC) and equilibrium price, will be 0 because MC = equilibrium price, and MC (Supply) is horizontal at price of $40.
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