A firm with a demand curve P = 10 - Q is a perfect price discriminating monopolist with zero marginal costs and fixed costs of 12. Consider the following two statements comparing the price discriminating case with a single price monopolist. 1) In this case consumers are better off as a group because more of the product is produced. 2) Producers are better off because they have higher profits. Which of the following comments about these statements is true?
A)Both statements are true.
B)Only the first statement is true.
C)Only the second statement is true.
D)Both statements are false.

Question

A firm with a demand curve P = 10 - Q is a perfect price discriminating monopolist with zero marginal costs and fixed costs of 12. Consider the following two statements comparing the price discriminating case with a single price monopolist. 1) In this case consumers are better off as a group because more of the product is produced. 2) Producers are better off because they have higher profits. Which of the following comments about these statements is true? 
A)Both statements are true. 
B)Only the first statement is true. 
C)Only the second statement is true. 
D)Both statements are false.

Quizplus · Accepted Answer

For a single price monopolist, the profit-maximizing price and quantity are found where MR = MC. In this case, the monopolist would set P = 7 and Q = 3. The total profit for the single price monopolist would be (7-0)*3 - 12 = 9.

For the price discriminating monopolist, the profit-maximizing strategy is to charge each consumer their maximum willingness to pay, which results in a total quantity demanded of 5. The total profit for the price discriminating monopolist would be (10-0)*5 - 12 = 38.

Comparing the two situations, it is clear that the price discriminating monopolist earns higher profits (statement 2 is true), but the total quantity produced and consumed is higher under price discrimination (Q=5) compared to the single price monopolist (Q=3), suggesting that consumers are better off as a group under price discrimination (statement 1 is false). Therefore, the correct choice is C.

A Firm with a Demand Curve P = 10 -