Many schemes for price discrintination involve somecosL For example, discount coupons take up the timeand resources of both the buyer and the seller. Thisquestion considers the implications of costly pricediscrimination. To keep things simple, let's assumethat our monopolist's production costs arc simplyproportional to output so that average total cost andmarginal cost arc constant and equal to each other.CHAPTER 15 MONOPOLY 317a. Draw the cost., demand, and marginal-revenuecurves for the monopolist. Show the pricethe monopolist would charge without pricediscrimination.b. ln your diagram, mark the area equal to the mernopolist's prolit and call it X. Mark the area equalto consumer surplus and call it Y. Mark the areaequal to the deadweight loss and call it Z.c. Now suppose that the monopolist can perfectlyprice discriminate. What is the monopolist'sprofit? (Give your answer in terms of X, Y, and Z.)d. What is the change in the monopolist's prolit fromprice discrimination? What is the change in totalsurplus from price discrimination? Which changeis larger? Explain. (Give your answer in terms ofX, Y,and Z.)c . Now suppose that there is some cost associatedwith price discrimination. To model this cost, let'sassume that the monopolist has to pay a fixed costC to price discriminate. How \\10uld a monopolistmake the decision whether to pay this lixed cost?(Give your answer in terms of X, Y, Z, and C.)f. How would a benevolent social planner, whocares about total surplus, decide whether themonopolist should price discriminate? (Give youranswer in terms of X~ Y, z .. and C.)g. Compare your answers to parts (c) and (f). Howdocs the monopolist's incentive to price discrintinatediffer from the social planner's? Is it possiblethat the monopolist will price discriminate eventhough doing so is not socially desirable?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Many schemes for price discrintination involve some
cosL For example, discount coupons take up the time
and resources of both the buyer and the seller. This
question considers the implications of costly price
discrimination. To keep things simple, let's assume
that our monopolist's production costs arc simply
proportional to output so that average total cost and
marginal cost arc constant and equal to each other.
CHAPTER 15 MONOPOLY 317
a. Draw the cost., demand, and marginal-revenue
curves for the monopolist. Show the price
the monopolist would charge without price
discrimination.
b. ln your diagram, mark the area equal to the mer
nopolist's prolit and call it X. Mark the area equal
to consumer surplus and call it Y. Mark the area
equal to the deadweight loss and call it Z.
c. Now suppose that the monopolist can perfectly
price discriminate. What is the monopolist's
profit? (Give your answer in terms of X, Y, and Z.)
d. What is the change in the monopolist's prolit from
price discrimination? What is the change in total
surplus from price discrimination? Which change
is larger? Explain. (Give your answer in terms of
X, Y,and Z.)
c . Now suppose that there is some cost associated
with price discrimination. To model this cost, let's
assume that the monopolist has to pay a fixed cost
C to price discriminate. How \\10uld a monopolist
make the decision whether to pay this lixed cost?
(Give your answer in terms of X, Y, Z, and C.)
f. How would a benevolent social planner, who
cares about total surplus, decide whether the
monopolist should price discriminate? (Give your
answer in terms of X~ Y, z .. and C.)
g. Compare your answers to parts (c) and (f). How
docs the monopolist's incentive to price discrintinate
differ from the social planner's? Is it possible
that the monopolist will price discriminate even
though doing so is not socially desirable?

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