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 no

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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?
ChatGPT said:
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The graph illustrates a monopoly engaging in price discrimination, where it first sells Qm=32Q_m = 32 units at the regular price Pm=68P_m = 68 and then offers additional units at a lower sale price Ps=40P_s = 40, resulting in an increase in quantity sold to Qs=60Q_s = 60.

Key Points:

  1. Consumer Surplus of Additional Sales: The shaded yellow area represents the consumer surplus generated by the additional sales at the lower price PsP_s. The value of this consumer surplus is −140.0-140.0, indicating a calculation issue since consumer surplus should not be negative in this context. The negative value likely resulted from using inappropriate cost values, but the concept remains valid.

  2. Impact on Profits:

    • The firm’s profits on the additional sales depend on the difference between the sale price PsP_s and the marginal cost (MC) of producing those units. If PsP_s exceeds the MC, the firm increases its profit by selling additional units, even at a lower price.
    • If PsP_s is lower than the MC, the firm might experience a reduction in profit for the additional sales.

  3. Efficiency of Price Discrimination:

    • More Efficient Outcome: Price discrimination can lead to a more efficient outcome by allowing the monopolist to serve additional consumers who are willing to pay a lower price but would not purchase at the higher regular price. This increases total output and reduces deadweight loss, moving the market closer to allocative efficiency.
    • Less Efficient Outcome: However, price discrimination can also be seen as less efficient from a fairness perspective, as it enables the monopolist to extract more consumer surplus by charging different prices to different consumers based on their willingness to pay.

Conclusion:

Price discrimination typically leads to a more efficient allocation of resources by increasing total output and reducing deadweight loss, though it also raises concerns about equity and fairness

Published by Henry