Table 15-1
A monopolist faces the following demand curve:
Marginal cost is constant at $8 per unit.
-Refer to Scenario 15-1.How much additional profit will the museum earn if it engages in price discrimination compared to charging each customer $8 for admission?

Question

Table 15-1
A monopolist faces the following demand curve:
  Marginal cost is constant at $8 per unit.
-Refer to Scenario 15-1.How much additional profit will the museum earn if it engages in price discrimination compared to charging each customer $8 for admission?

Quizplus · Accepted Answer

If the museum charges each customer $8 for admission, it will produce and sell 10 units, which is the quantity at which marginal revenue equals marginal cost. At this output level, the museum's total revenue is $80, and its total cost (including fixed cost) is $88, resulting in a loss of $8.
If the museum practices price discrimination, it will charge a higher price to the customers with a more inelastic demand (i.e., students and seniors). Let's assume that the museum charges $10 for students and seniors and $6 for children. To maximize profits, the museum should sell 7 units to the students and seniors and 3 units to the children, for a total revenue of $76. The total cost remains $88, resulting in a loss of $12.
However, the additional profit earned from price discrimination is the difference between the revenue under price discrimination and the revenue under the single pricing strategy, which is $76 - $80 = -$4. Therefore, the museum will not earn any additional profit from engaging in price discrimination but rather incurs a bigger loss.

Table 15-1 A Monopolist Faces the Following Demand Curve