Assume a monopolist can prevent resale of its product and it has complete information about each one of its customers. Even though each customer has a different demand curve, the seller can identify each customer's demand curve before a purchase takes place. It faces the inverse market demand of P = 160 - 10Q with marginal cost of MC = 10 + 5Q. The total surplus at the profit-maximizing result is $____.
A) 500
B) 400
C) 200
D) 0

Question

Quizplus · Accepted Answer

The monopolist can perfectly price discriminate since it can prevent resale and knows each customer's demand curve. Perfect price discrimination means the monopolist captures all consumer surplus as profit, leaving no deadweight loss. Total surplus in this scenario equals the area under the demand curve above the marginal cost curve up to the profit-maximizing quantity. To find this, first, we find the profit-maximizing quantity where MR = MC. Since the monopolist can perfectly price discriminate, it effectively sets MR equal to the demand curve. However, for calculation purposes, we need to find the quantity where the monopolist no longer finds it profitable to sell additional units, which typically involves equating MR and MC, but given the information, we'll directly calculate the area under the demand curve above MC.The inverse demand function is P = 160 - 10Q, and the marginal cost function is MC = 10 + 5Q. To find the total surplus, we need to calculate the area of the triangle formed by the demand curve and the marginal cost line up to the point where the firm stops producing, which is not directly given but can be inferred from the need to calculate surplus.Given the complexity of directly calculating the exact quantity without equating MR to MC in the traditional sense due to the nature of perfect price discrimination, we focus on the concept that total surplus in a perfectly price discriminating monopoly is maximized because it captures all the area under the demand curve down to its MC. This area represents the total surplus, which includes what would be consumer surplus in a competitive market.Without the exact quantity, we can't directly calculate the area using the given functions. However, understanding that perfect price discrimination leads to the monopolist capturing all possible surplus, we look for the answer that might represent a reasonable total surplus given the demand curve and marginal cost information. The correct answer would typically involve calculating the integral of the demand curve minus the integral of the MC over the relevant quantity range, but the specifics of this calculation are not provided in the question or the choices directly.Given the nature of the question and the lack of direct calculation, the response is based on the understanding of economic theory regarding perfect price discrimination rather than a specific numerical calculation from the provided functions. The key takeaway is that perfect price discrimination results in the monopolist capturing what would traditionally be both consumer and producer surplus, maximizing total surplus captured by the firm itself.

Assume a Monopolist Can Prevent Resale of Its Product and It