Assume that a profit-maximizing monopoly is charging a single price. If the monopoly can price discriminate and charge each consumer what he or she is willing to pay, which of the following will occur? aThe quantity of output produced will increase. bTotal cost will decrease. cConsumer surplus will increase. dEconomic profit will decrease.
Question
Assume that a profit-maximizing monopoly is charging a single price. If the monopoly can price discriminate and charge each consumer what he or she is willing to pay, which of the following will occur? aThe quantity of output produced will increase. bTotal cost will decrease. cConsumer surplus will increase. dEconomic profit will decrease.
Solution
If a profit-maximizing monopoly can price discriminate and charge each consumer what he or she is willing to pay, the following will occur:
a) The quantity of output produced will increase. This is because the monopoly can now sell to consumers who were previously priced out of the market.
b) Total cost will not necessarily decrease. While the monopoly can now sell more units, the cost of producing these additional units may increase total cost.
c) Consumer surplus will decrease. This is because price discrimination allows the monopoly to capture more of the consumer surplus. Each consumer is now paying the maximum they are willing to pay, leaving no surplus.
d) Economic profit will increase. With price discrimination, the monopoly can capture more consumer surplus and turn it into profit.
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