Price discrimination requires a firm to have at least some market power. This means that any firm that is not perfectly competitive has the ability to price discriminate. For now, we’ll focus on monopoly.

Draw the graph showing producer equilibrium 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 as a result of the sale? Is price discrimination more allocatively efficient? Does price discrimination lead to a more efficient or less efficient outcome? Why or why not?

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