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6/19/22, 5:36 PM Aplia: Student Question https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentId=594370205413401683037472468&eISBN=9781337096577&id=1507053691&snap… 1/3 Points: 0 / 1 Close Explanation Back to Assignment Attempts 0.6 Keep the Highest 0.6 / 3 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.) Explanation: Barefeet will produce the level of output at which its marginal revenue is equal to its marginal cost; this occurs at a quantity of 200 pairs of Ooh boots. It will charge a monopolist's price of $65 per pair, the maximum amount consumers are willing to pay at this output level. Recall that profit is equal to total revenue minus total cost: Your Answer Monopoly Outcome Consumer Surplus Profit Deadweight Loss 0 80 160 240 320 400 480 560 640 720 800 100 90 80 70 60 50 40 30 20 10 0 PRICE (Dollars per pair of Ooh boots) QUANTITY (Pairs of Ooh boots) Demand MC = ATC MR Correct Answer

6/19/22, 5:36 PM Aplia: Student Question https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentId=594370205413401683037472468&eISBN=9781337096577&id=1507053691&snap… 2/3 Points: 0.25 / 1 Close Explanation Therefore, profit is the rectangular area below the monopolist's price of $65, above the average total cost curve, and to the left of the quantity of Ooh boots produced. Notice that profit is equal to producer surplus, in this case, given the initial assumption that there are no fixed costs. Consumer surplus is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays. Graphically it is the triangular area below the demand curve, above the monopolist's price of $65, and to the left of the equilibrium quantity of boots consumed. When the monopolist cannot price discriminate, it charges a price above its marginal cost, so not all consumers who value the good at more than its marginal cost are able to buy it. Thus, deadweight loss exists and is represented by the triangular area between the demand curve and the marginal cost curve to the right of the quantity produced. This represents the welfare loss to society due to the higher price charged and lower quantity sold. 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.) Explanation: Barefeet will continue to produce until the price it can charge the marginal consumer is equal to the marginal cost of producing that unit. Therefore, Barefeet will charge each consumer his or her willingness to pay, and it will supply 400 pairs of Ooh boots. Your Answer Monopoly Outcome Profit Consumer Surplus Deadweight Loss 0 80 160 240 320 400 480 560 640 720 800 100 90 80 70 60 50 40 30 20 10 0 PRICE (Dollars per pair of Ooh boots) QUANTITY (Pairs of Ooh boots) Demand MC = ATC Correct Answer