The accompanying figure depicts the downward-sloping market demand (D) curve for a five-day western Caribbean cruise on Carnival Cruise Lines. The price (P) is per person in U.S. dollars, and the quantity (Q) is the number of passenger tickets sold. This figure also shows the company's relevant marginal revenue (MR) curve and marginal cost (MC) curve. Use this figure to answer the questions.
-Calculate the change in total welfare if Carnival Cruise Lines moves from a monopolist model that charges a single price to a perfect price discrimination model.

Question

The accompanying figure depicts the downward-sloping market demand (D) curve for a five-day western Caribbean cruise on Carnival Cruise Lines. The price (P) is per person in U.S. dollars, and the quantity (Q) is the number of passenger tickets sold. This figure also shows the company's relevant marginal revenue (MR) curve and marginal cost (MC) curve. Use this figure to answer the  questions. 
-Calculate the change in total welfare if Carnival Cruise Lines moves from a monopolist model that charges a single price to a perfect price discrimination model.

Quizplus · Accepted Answer

Moving from a monopolist model to perfect price discrimination would allow Carnival Cruise Lines to charge a higher price to customers with higher willingness to pay and a lower price to customers with lower willingness to pay. This would result in an increase in total revenue for the company and a decrease in consumer surplus. However, producer surplus would increase by an amount greater than the decrease in consumer surplus, resulting in a net gain in total welfare. Based on the graph, the change in total welfare would be equal to the area of the triangle formed by the points where the MR and MC curves intersect the horizontal axis (representing the new quantity sold) and the point where the D curve intersects the vertical axis (representing the new price). This area is equal to ($40 x 20,000)/2 - ($20 x 10,000)/2 = $400,000.

The Accompanying Figure Depicts the Downward-Sloping Market Demand (D) Curve