If a monopoly charges higher prices to consumers who buy smaller quantities than to consumers who buy larger quantities,then
A) consumer surplus is larger than under single-price monopoly.
B) social welfare is larger than under perfect competition.
C) the monopoly's profits are larger than under single-price monopoly.
D) the monopoly's profits are larger than under perfect price discrimination.

Question

Quizplus · Accepted Answer

Charging higher prices to consumers who buy smaller quantities, also known as nonlinear pricing, is a form of price discrimination. This allows the monopoly to capture additional consumer surplus by charging the higher prices to consumers with relatively inelastic demand. As a result, the monopoly's profits are larger than under single-price monopoly, which charges the same price to all consumers regardless of the quantity they buy. However, this form of price discrimination is less efficient than perfect price discrimination, where the monopoly charges each consumer their maximum willingness to pay, resulting in a larger social welfare compared to both single-price monopoly and nonlinear pricing. Therefore, option (B) is incorrect, and options (A) and (D) are also incorrect as they are not directly related to charging different prices based on the quantity bought.

If a Monopoly Charges Higher Prices to Consumers Who Buy