A firm with market power has the inverse demand curve P = 90 - 1.5Q and the marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its producer surplus will:
A) decrease from $750 to $550.
B) increase from $800 to $1,280.
C) increase from $400 to $840.
D) decrease from $1,600 to $880.

Question

Quizplus · Accepted Answer

Under perfect price discrimination, a firm captures all consumer surplus as producer surplus. The area of producer surplus is the area above the MC curve and below the demand curve, up to the quantity sold. To find the quantity where MR = MC under perfect price discrimination, equate MC to the derivative of the revenue function (which is the integral of the inverse demand curve). However, for simplicity in this case, we calculate the increase in producer surplus directly from the given options. The correct calculation involves integrating the area between the MC and the demand curve, which results in an increase in producer surplus, as option B suggests.

A Firm with Market Power Has the Inverse Demand Curve