7. Price discrimination and welfare Now, imagine that arefest can practise perfect price discrimination-that is, it knows each consumer’s willingness to pay for each pair of Ooh boots and is able to charge each consumer that amount. Imagine Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $40 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this, combined with the fact that Barefeet’s marginal cost is constant, means that its marginal cost On the following graph, use the black point (plus symbol) to indicate the profit- maximising quanity sold and the lowest price at wich the firm sells its boots. Next, use the purple points (diamond symboi) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the black points (plus symbol) to shade the deadweight loss in this market with perfect price discrimination. Note: If you decide that consumer surplus, profit, or deadweight loss equals zero, indicate this by leaving that element in its original position on the palette.) curve is also equal to the average total cost (ATC) curve. First, imagine that Barefeet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer’s willingness and ability to pay On the following graph, use the black point (plus symbol) to indicate the profit maximising price and quantity. Next, use the purple points (diamond symbol) to Monopoly Outcome shade the profit, the green points (triangle symbol) to shade the consumer 70 surplus, and the black points (plus symbol) to shade the deadweight loss in this market without price discrimination. (Note: If you decide that consumer surplus, profit, or deadweight loss equals zero, indicate this by leaving that element in its MCATC original position on the palette.) Consumer Surplus Deadweight Loss Monopoly Outcome 80 0 80 0 240 320 40 480 50 40 720 800 QUANTITY (Pairs of boots) Consumer Surplus Consider the welfare effects when the industry operates under a monopoly and cannot price discriminate versus when it can price discriminate. MC = ATC Profi Complete the following table by indicating under which market conditions each of the statements is true. (Note: If the statement isn’t true for either single-price moภ0poies or perfect price discrimination, leave the entire row unchecked.) Check ail that apply Deadweight Loes Single-price Honopoly Perfect Price Discrimination 10 Total surplus is not maximised There is no deadweight loss assodated with the profit-maximising output Barefeet produces a quantity more than the effident quantity of 0oh boots. MR D 01240 320 4 00 040 720 800 OUANTITY Pairs of boots)
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