A firm with market power has the inverse demand curve P = 160 - 4Q and the marginal cost curve MC = 8Q. If the firm decides to practice perfect price discrimination, consumer surplus will:
A) increase from $40 to $60.
B) increase from $120 to $200.
C) decrease from $80 to $20.
D) decrease from $200 to $0.

Question

Quizplus · Accepted Answer

Under perfect price discrimination, a firm charges each consumer the maximum they are willing to pay, capturing all the consumer surplus for itself. Initially, consumer surplus is the area under the demand curve and above the price level. With perfect price discrimination, all this surplus is transferred to the producer, reducing consumer surplus to $0.

A Firm with Market Power Has the Inverse Demand Curve