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?
|Correctly draw the graph for producer equilibrium, including demand, marginal revenue & marginal cost||5|
|Correctly identify the profit maximizing level of output and price||2|
|Correctly show how much sales will increase in response to the sale. (Show the new price and quantity on the graph.)||4|
|Identify the additional consumer surplus of the sale.||2|
|Identify the additional profits of the sale.||2|
|Explain how the effects of the sale affects allocative efficiency||5|