Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-5
-Refer to Figure 10-5. In order to maximize its profits, a perfect-price-discriminating monopolist produces the quantity

Question

Suppose a monopolist faces the demand curve and cost curves shown below.
  FIGURE 10-5
-Refer to Figure 10-5. In order to maximize its profits, a perfect-price-discriminating monopolist produces the quantity

Quizplus · Accepted Answer

A perfect-price-discriminating monopolist charges each consumer the maximum amount they are willing to pay for each unit of the good. In other words, the monopolist charges each consumer a different price based on their individual willingness to pay.

At the quantity Q2, the marginal cost (MC) of production equals the marginal revenue (MR) from selling the output. This is the profit-maximizing quantity for any monopolist, regardless of whether they can price discriminate or not.

At this quantity, the monopolist charges a price equal to the highest willingness to pay of any consumer. In this case, that is $10. So, the monopolist produces Q2 and charges a price of $10 to every consumer. This results in a total profit of ($10 - $5) x Q2 = $25.

Note that if the monopolist could not price discriminate, they would have to charge the same price to every consumer. In that case, they would choose to produce Q1 and charge a price of $8, which would result in a total profit of ($8 - $5) x Q1 = $9. So, price discrimination allows the monopolist to increase their profits from $9 to $25.

Suppose a Monopolist Faces the Demand Curve and Cost Curves