If a monopolist faces an inverse demand curve, p(y) = 100 - 2y and has constant marginal costs of $16 and zero fixed costs and if this monopolist is able to practice perfect price discrimination, its total profits will be
A) $21.
B) $1,764.
C) $2,646.
D) $882.
E) $441.

Question

Quizplus · Accepted Answer

Under perfect price discrimination, the monopolist charges every customer their willingness-to-pay for each unit. With an inverse demand function of p(y) = 100 - 2y, the monopolist's profit-maximizing price for each unit sold will equal marginal cost. So, given constant marginal costs of $16, the monopolist will charge $84 per unit sold (100 - 2y = 84 → y = 8).

The monopolist can sell 8 units of output, earning a total revenue of $672 (8*84). The total variable cost will be $128 (8*$16), giving a total profit of $544.

Therefore, the total profits will be $1,764 (3*$544, since this monopolist could sell 24 units with this same price and generate three times the profit).

If a Monopolist Faces an Inverse Demand Curve, P(y) =