: Suppose you are amonopolist and you have two customers, Aand B. Each will buy either zero or one unitof the good you produce. A is willing to payup to $35 for your product: B is willing to payup to $10. You produce this good at aconstant average and marginal cost of $8.Ifyou could practice third-degree pricediscrimination, you will eam a profit of $

If you don't engage yourself in third-degree price discrimination, then you will charge the highest willingness to pay price. Here, the highest willingness to pay is $35 by consumer A. So, you will charge that price for both your consumer. Unfortunately consumer A will buy your product but consumer B will not buy your product as his willingness to pay is $10 which is lower than the price you set for the product. So, the price that you will charge is $35. If you could engage in third-degree price discrimination, you can charge different prices for different consumers. To maximize you profit you will charge a price that equals the willingness to pay of your consumers (iff that willingness to pay is higher than the marginal cost). Here, consumer A's willingness to pay is $35. So, you will charge $35 from him. And, consumer B's willingness to pay is $10. So, you will charge $10 from him. [Note: Both the consumer's willingness to pay is higher than the marginal cost of $8]. Your Total Cost here will be, Total Cost = $(8 + 8) Or, Total Cost = $16 And, Total Revenue = $(35 + 10) Or, Total Revenue = $45 So, Profit = Total Revenue - Total Cost Or, Profit = $(45 - 16) Or, Profit = $29 So, if you could exercise third-degree price discrimination, you will earn a profit of $29.

Answered: : Suppose you are a monopolist and you…

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: Suppose you are a monopolist and you have two customers, A and B. Each will buy either zero or one unit of the good you produce. A is willing to pay

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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