MICROECONOMICS Discussion 7: Price Discrimination

1. (1/2 page) Draw the graph for a monopoly with demand, marginal revenue, and marginal cost curves. Identify the profit-maximizing output level (Qm) and price (Pm). Suppose the monopolist sells Qm units of output at the regular price and then puts the product on sale at a lower price, Ps. Show the new price and quantity. Identify the consumer surplus of the additional sales. What happens to the firm’s profits? Does price discrimination lead to a more efficient or less efficient outcome? Why or why not? 2. (1/2 page) Reply to two peers below with thoughtful responses: (please check the attachment for the graphs) a. As we can see from the graph, the new profit would be less than profit-maximizing level thus the profit would not be maximized. Price discrimination will lead to a more efficient outcome since it increases social welfare and decreases deadweight loss. A monopoly determines not only the quantity to produce but also the price it will charge. The demand curve the firm faces is the market demand curve. Thus if it wants to sell more, it must lower the price. Since the firm is also the market demand curve, it has one hundred percent of the market share; however, monopolies may advertise to increase overall market demand or to improve goodwill or public relations. (Graph a1,a2) b. Monopoly would be a market / firm where there are many consumers but one seller. The seller usually has full control on the price, since its controlled by one single seller. The demand curve in picture 1 sloped downward from left to right, because lower price would cause higher quantity demand. The marginal revenue curve slopes downward beneath the demand curve. Marginal cost equals Marginal Revenue, so point E would be equilibrium. Pm would be the price and Qm would be the quantity produced. In the second graph, higher price is charged , (Ps), which reduces quantity output (Q). At higher price , lower quantity would not be sold out. Therefore, the profit would not be maximum. Price discrimination is more effective to earn more profit because Monopolist fix price as per consumer’s elasticity of demand. (graph b1,b2)

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