A monopolist faces a demand curve given by P=10-Q and has constant marginal (and average cost) of...
Question:
A monopolist faces a demand curve given by {eq}P=10-Q {/eq} and has constant marginal (and average cost) of 2. What is the economic profit made by this profit-maximizing monopolist if they engage in perfect price discrimination?
a. 32
b. 64
c. 100
d. 121
e. None of the above
Perfect Price Discrimination:
Perfect Price Discrimination is the first order price discrimination in which the monopolist charges each consumer on the basis of what they are willing to pay. This makes the monopolist to expolit the entire consumer surplus. There is thus no consumer surplus in this market.
Answer and Explanation: 1
B. $64
Reason:
Given,
P = 10 - Q
MC = $2
The monopolist will set P = MC to decide the level of output, in case of perfect price discrimination
So,
10 - Q = 2
Q = 8
The maximum possible price that the producer will charge will be: P = 10
TR = P * Q
TR = 10 * 8 = $80
TC = AC * Q
TC = 2 * 8
TC = $16
Profit = TR - TC = $80 - $16 = $64
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Price Discrimination: Definition, Types & Examples
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Chapter 3 / Lesson 53
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