Chapter 63, Problem 2FRQ

To determine

Graph showing a monopoly with a horizontal average total cost curve, monopoly’s profit practicing perfect price discrimination.

Explanation of Solution

  

The above diagram shows the perfect price-discrimination monopolist diagram in which ATC is the average total cost which is horizontal, D is the demand curve which is downward sloping and the shaded area is the profit of the monopolist. Since it is perfect price discrimination, the monopolist charges a price equal to the maximum willingness to pay of all groups of consumers and leaves zero consumer surplus and converts it into profit.

Economics Concept Introduction

When a monopolist charges a different price to different groups of consumers to their maximum willingness to pay, it is called perfect price discrimination. In perfect price discrimination, monopolists extract all consumer surplus.