Monopoly Price Discrimination/Efficiency Practice

All of the following are allocatively efficient EXCEPT which option?

• A perfectly competitive firm earning positive economic profit in the short run

• A single-price monopolist

• A perfectly competitive firm earning normal economic profit in the long run

• A perfectly competitive firm earning negative economic profit in the short run.

Answer explanation

A single price monopolist charges a price higher than marginal cost, which means it is not allocatively efficient.

The graph shown here illustrates the demand curve, marginal revenue curve, and the cost curves for a profit-maximizing monopolist with constant costs. What area represents deadweight loss (“DWL”) if this firm chooses a single price and what is the deadweight loss if this firm can perfectly price discriminate?

• DWL=0 for a single price monopolist; DWL =0 for a perfect price discriminating monopolist

• DWL=fkj for a single price monopolist; DWL =0 for a perfect price discriminating monopolist

• DWL= PafPb for a single price monopolist; DWL = klm for a perfect price discriminating monopolist

• DWL=Kih for a single price monopolist; DWL = fjk for a perfect price discriminating monopolist

Answer explanation

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?

• 9$

• 46$

• 76$

• 36$

Answer explanation

For a perfect price discriminating monopolist, profit is the area under the demand curve and above the average total cost curve for the quantity produced

The graph shown here illustrates the demand curve, marginal revenue curve, and the cost curves for a profit-maximizing monopolist with constant costs. What are represents the firm's producer surplus?

• PwaPx

• P2Q40

• PwfQz0

• PwfPz

Answer explanation

A perfectly price discriminating monopolist produces the quantity where demand equals the marginal cost which is Q3 in this graph. Profit is the difference between price and average total cost, so if the firm can perfectly price discriminate, this is the area underneath the demand curve and above average total cost represented by the shaded area in this graph:

Patel Industries is a profit maximizer that sells custom made hats and is the only producer in a market. It charges some customers more than other customers because the hats bought by some buyers cost Patel more to produce than the hats purchased by other buyers. Based on this information, each statement below is true EXCEPT

• Patel Industries is a price discriminating monopolist.

• Patel Industries operates in an industry with barriers to entry.

• Patel industries will produce the quantity where marginal cost equals marginal revenue

• Patel Industries has a downward sloping demand curve.

Answer explanation

If all of the hats had an identical cost of production, then Patel would be a price discriminating monopolist. However, if the price of a hat varies based on cost of production, then consumers aren’t being charged based on their willingness to pay.