Answered: Suppose Barefeet is a monopolist that…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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## Monopoly and Price Discrimination in the Boot Industry

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.

### Graph Description

- **Axes:**
- **X-axis:** Quantity (Pairs of Ooh boots) ranging from 0 to 800.
- **Y-axis:** Price (Dollars per pair of Ooh boots) ranging from 0 to 100.

- **Lines:**
- A downward sloping **Demand** line from $100 at quantity 0 to $0 at quantity 800.
- A horizontal line representing **MC = ATC** at the price of $40.

- **Legend Symbols:**
- **Black Plus:** Monopoly Outcome.
- **Purple Diamond:** Profit.
- **Green Triangle:** Consumer Surplus.
- **Black Plus:** Deadweight Loss.

### Welfare Effects in Monopoly versus Perfect Price Discrimination

Consider the welfare effects when the industry operates under a monopoly and cannot price discriminate versus when it can price discriminate.

### Statements Table

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.

| Statement | Single-price Monopoly | Perfect Price Discrimination |
|----------------------------------------------------------------------------|-----------------------|-----------------------------|
| There is no deadweight loss associated with the profit-maximizing output. | | |
| Barefeet produces a quantity less than the efficient quantity of Ooh boots.| | |
| Total surplus is not maximized. | | |

This exercise is designed to help students understand the economic welfare implications of monopolistic behavior and price discrimination in a market.

Transcribed Image Text:### 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.) ![Graph depicting demand and supply curves with price discrimination and welfare indicators] In the depicted graph: - The **blue line** represents the **Demand** curve showing the maximum price consumers are willing to pay for each quantity level. - The **gray line** represents the **MR (Marginal Revenue)** curve showing the additional revenue from selling an additional unit. - The **orange line** at $40 depicts the **MC (Marginal Cost) = ATC (Average Total Cost)**, showing the constant cost per unit for producing Ooh boots. The areas to identify and shade on the graph are as follows: - **Monopoly Outcome (cross symbol)**: The point where MR equals MC indicates the profit-maximizing quantity for Barefeet. - **Consumer Surplus (triangle symbol)**: The triangular area between the demand curve above and the price line below, showing the difference between what consumers are willing to pay and what they actually pay. - **Profit (diamond symbol)**: The rectangular area between the price line above and the MC = ATC line below, over the quantity sold, showing the profit obtained by Barefeet. - **Deadweight Loss (plus symbol

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