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ECON 1010 Chapter Notes - Chapter 4: Reservation Price, Price Discrimination, Marginal Revenue

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School
University of Manitoba
Department
Economics
Course
ECON 1010
Professor
Laura K.Brown

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ECON 1010 Full Course Notes
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Assume first degree price discrimination is allowed. Marginal revenue is hence equal to the marginal benefit. This is because selling more units in a new country does not require the monopolist to reduce the price on all of the units sold in the other country. Cost benefit principle suggests that the monopolist should expand production until the marginal revenue is equal to marginal cost. Results: quantity sold is same as perfectly competitive market. Hence, a monopolist engaging in first degree price discrimination is also selling socially optimal quantity. However, although social surplus is maximised, the distribution of surplus across the society is very uneven: the monopolist charges consumers exactly their marginal benefit. The monopolist is the one who accrued all the surplus available in the market. There are situations where a monopolist cannot engage in first degree price discrimination. This might be due to existing laws that prevents the monopolist to do so.

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Related Questions

3rd degree price discrimination. We have the same market conditions as the previous problem. p1(q1) = 1, 000 − q1 p2(q2) = 500 − q2 This producer also faces a constant marginal cost of 100.

i. If the monopolist is able to effectively conduct 3rd degree price discrimination, what are the optimal price-quantity pairs for each group of consumers?

ii. What is the total CS, PS, and W from both markets?

iii. If the monopolist can only charge a single price, what are the optimal output and price?

iv. How much is sold to each type of consumer?

v. Find the CS, PS, and W for this scenario.

vi. Compare the three welfare measures in the two scenarios.

Suppose a monopolist faces a demand curve for its output of P = 300−Q. This means that the marginal revenue curve of the monopolist is M R = 300 − 2Q. Assume that the marginal cost of production is constant and equal to $40.

a) Write down an expression for the monopolists profit, as a function of the quantity of output it produces.

b) If the monopolist must charge the same price for all units of output that it sells (that is, if the monopolist is a single price monopolist), what level of output will maximise the monopolists profit? What price will the monopolist charge? What is its level of profit?

c) If this were a competitive market instead of a monopoly, what level of output would be produced and what price would be charged? What is the level of profit for firms if it were perfectly competitive?

d) Draw a diagram of demand, marginal revenue, and marginal cost that illustrates your answer to part b). From this work out consumer surplus and producer surplus.

e) Draw the same diagram but for your answer to c), the case of the competitive market. From this work out consumer surplus and producer surplus. How much deadweight loss is there from the monopoly? Why?

16. A monopoly will set the price

  at the highest price along the demand it faces.
  equal to the value at which marginal cost intersects the demand curve.
  so that it can sell the quantity at which marginal revenue is equal to marginal cost.
  so that it can sell the quantity at which marginal revenue is equal to zero.

17.

A monopolist will always end up choosing to operate

  even if its profit are negative.
  on the elastic portion of the demand it faces.
  until such time as a new competitor enters its market.
  only if it can capture the entire consumer surplus.

18.

When first-degree price discrimination is perfectly implemented social gain is maximized, with all gains going to the monopoly.

  True
  False

19.

Which of the following is the best example of second-degree price discrimination?

  A car salesman attempts to discover and charge the highest price that the customer is willing to pay.
  A sub sandwich shop that gives you a half-price sandwich for every six sandwiches you purchase.
  Manufacturers’ use of discount coupons printed in Sunday newspapers.
  Polaroid cameras and film.

20.

Third-degree price discrimination occurs when a monopoly separates its customers into distinct markets, charging a different price to each group.

  True
  False