Question

Microeconomics

Posted 5 months ago

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The graph shown here illustrates the demand curve, marginal revenue curve, and the cost curves for a profit-maximizing monopolist with constant costs.
If this monopolist can price discriminate, what is the value of its profit?
Choose 1 answer:
(A) $\$ 9$
(B) $\$ 48$
(C) $\$ 76$
(D) $\$ 36$
(E) $\$ 18$
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Answer from Sia

Posted 5 months ago

Solution

a

Identify the key points on the graph: The intersection of MC and ATC at $8, the intersection of MC and MR at a quantity of 3, and the intersection of MR and demand at a quantity of 5

b

Determine the monopolist's profit under perfect price discrimination: Under perfect price discrimination, the monopolist captures all consumer surplus as profit. The profit is the area between the demand curve and the MC curve up to the quantity where MR = MC

c

Calculate the total revenue: The total revenue is the area under the demand curve up to the quantity of 5. This is calculated as $14 \times 5 =$70

d

Calculate the total cost: The total cost is the area under the MC curve up to the quantity of 5. This is calculated as $8 \times 5 =$40

e

Calculate the profit: The profit is the total revenue minus the total cost, which is $70 -$40 = $30

Answer

$30

Key Concept

Perfect price discrimination allows a monopolist to capture all consumer surplus as profit.

Explanation

Under perfect price discrimination, the monopolist sets different prices for each unit sold, capturing the maximum willingness to pay for each unit. This results in the monopolist's profit being the area between the demand curve and the marginal cost curve up to the quantity where marginal revenue equals marginal cost.

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