7. Price discrimination and welfare Suppose Clomper's is a monopolist that manufactures and sells Stompers, an extremely trendy shoe brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Clomper's faces, as well as its marginal cost (MC), which is constant at $40 per pair of Stompers. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Clomper's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve. First, suppose that Clomper's cannot price discriminate. That is, it must charge each consumer the same price for Stompers 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.) PRICE (Dollars per pair of Stompers) 100 90 80 70 60 50 40 30 20 10 0 MR MC = ATC Demand 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Pairs of Stompers) + Monopoly Outcome Δ Consumer Surplus Profit Deadweight Loss ? Suppose now that Clomper's is able to perfectly price discriminate that is, it knows each consumer's willingness to pay for a pair of Stompers and is able to charge each consumer precisely that amount.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

Transcribed Image Text:7. Price discrimination and welfare Suppose Clomper's is a monopolist that manufactures and sells Stompers, an extremely trendy shoe brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Clomper's faces, as well as its marginal cost (MC), which is constant at $40 per pair of Stompers. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Clomper's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve. First, suppose that Clomper's cannot price discriminate. That is, it must charge each consumer the same price for Stompers 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.) PRICE (Dollars per pair of Stompers) 100 90 80 70 30 20 10 0 0 40 MR MC = ATC Demand 80 120 160 200 240 280 320 360 400 QUANTITY (Pairs of Stompers) Monopoly Outcome Consumer Surplus Profit Deadweight Loss ? Suppose now that Clomper's is able to perfectly price discriminate that is, it knows each consumer's willingness to pay for a pair of Stompers and is able to charge each consumer precisely 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.)
PRICE (Dollars per pair of Stompers)
100
90
80
70
50
30
20
10
0
0
40
MC = ATC
Demand
80 120 160 200 240 280 320 360 400
QUANTITY (Pairs of Stompers)
+
Monopoly Outcome
Clomper's produces the efficient quantity of Stompers.
Profit
Consumer Surplus
Statement
There is no deadweight loss associated with the profit-maximizing output.
Total surplus is not maximized.
C
Deadweight Loss
Consider the welfare effects when the industry operates under a monopoly and cannot price discriminate versus when it can price discriminate.
Complete the following table by indicating under which market conditions each of the statements is true. (Note: If the statement isn't true for either
single-price monopolies or perfect price discrimination, leave the entire row unchecked.) Check all that apply.
Single-price Monopoly Perfect Price Discrimination
?
L

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 5 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions