Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows he market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $20 per pair of Ooh oots. 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 narginal 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 onsumer'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 ymbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the black points (plus symbol) to shade the leadweight loss in this market without price discrimination. (Note: If you decide that consumer surplus, profit, or deadweight loss equals zero, ndicate this by leaving that element in its original position on the palette.) 100 90 PRICE (Dollars per pair of Ooh boots) 8 8 70 40 30 20 10 0 0 MC-ATC MR Demand 20 40 80 80 100 120 140 160 180 200 QUANTITY (Pairs of Ooh boots) + Monopoly Outcome A Consumer Surplus Profit Deadweight Loss

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Transcribed Image Text:**Educational Website Content: Monopoly Pricing and Market Outcomes** **Overview:** Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph displays the market demand and marginal revenue (MR) curves that Barefeet faces, alongside its marginal cost (MC), which is constant at $20 per pair of Ooh boots. For simplicity, assume that fixed costs are 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. **Pricing Without Price Discrimination:** 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. **Graph Analysis:** - **Monopoly Outcome (Black Cross Symbol):** The graph includes a black cross to indicate the profit-maximizing price and quantity for the monopolist. - **Demand Curve (Blue Line):** Illustrates the relationship between price and quantity demanded for Ooh boots. - **Marginal Revenue Curve (Gray Line):** Shows the additional revenue generated from selling one more unit. - **Marginal Cost/ATC Curve (Orange Line):** Represents the constant cost of production per unit, set at $20. **Color-Coded Regions:** 1. **Consumer Surplus (Green Area):** The triangle space above the monopoly price and below the demand curve indicates consumer surplus. 2. **Profit (Purple Area):** The area between the price, the marginal cost (orange line), and the quantity sold reflects the monopolist's profit. 3. **Deadweight Loss (Black Area):** The space between the demand and marginal cost curves, beyond the monopoly quantity, illustrates the deadweight loss due to reduced consumer and producer surplus in a monopoly setting. **Instructions for Graph Use:** - Utilize the black point (plus symbol) to indicate the profit-maximizing price and quantity. - Use the purple points (diamond symbol) to shade the profit. - Use the green points (triangle symbol) to depict the consumer surplus. - Use the black points (plus symbol) to highlight the deadweight loss in this market when price discrimination is not practiced. **Note:** If you determine that consumer surplus, profit, or deadweight loss equals

**Title: Perfect Price Discrimination in Monopoly Markets**

**Overview:**

Barefeet can practice perfect price discrimination, meaning it can identify each consumer's willingness to pay for each pair of Ooh boots and charge them accordingly.

**Graph Explanation:**

This graph represents the market for Ooh boots with perfect price discrimination.

- **Axes:**
- The horizontal axis shows the quantity of Ooh boots (in pairs).
- The vertical axis shows the price per pair of Ooh boots (in dollars).

- **Curves:**
- **Demand Curve:** Slopes downward, showing the inverse relationship between price and quantity demanded.
- **MC = ATC (Marginal Cost = Average Total Cost):** A horizontal line indicating constant cost for producing each pair.

**Key Points:**

1. **Monopoly Outcome (Black Point):** The plus symbol identifies the profit-maximizing quantity and the lowest price at which the firm sells the boots.

2. **Profit (Purple Diamonds):** Shaded area representing the firm's profit when it charges each consumer their maximum willingness to pay.

3. **Consumer Surplus (Green Triangles):** In perfect price discrimination, consumer surplus is eliminated as each consumer pays exactly what they are willing to pay.

4. **Deadweight Loss (Black Points):** No deadweight loss occurs since all consumer surplus is converted to profit; leave this element as it is.

**Welfare Effects Comparison:**

An examination of the welfare effects when Barefeet either cannot or can conduct price discrimination:

**Statements:**

- **Total surplus is not maximized:**
- Single-price Monopoly: Checked
- Perfect Price Discrimination: Not Checked

- **There is no deadweight loss associated with the profit-maximizing output:**
- Single-price Monopoly: Not Checked
- Perfect Price Discrimination: Checked

- **Barefeet produces the efficient quantity of Ooh boots:**
- Single-price Monopoly: Not Checked
- Perfect Price Discrimination: Checked

In summary, perfect price discrimination results in maximum profit without consumer surplus or deadweight loss, while a single-price monopoly fails to maximize total surplus or produce the efficient quantity of goods.

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