A perfectly price discriminating monopolist charges each buyer
A. the perfectly competitive equilibrium price. ?
B. more than his or her reservation price. ?
C. exactly his or her marginal cost. ?
D. exactly his or her reservation price
The Correct Answer and Explanation is :
Correct Answer: D. Exactly his or her reservation price
Explanation:
A perfectly price-discriminating monopolist charges each buyer their reservation price, which is the maximum price a buyer is willing to pay for a given quantity of a good or service. This strategy allows the monopolist to capture all the consumer surplus (the difference between what consumers are willing to pay and what they actually pay in a competitive market).
Here’s why D is the correct answer:
- Definition of Perfect Price Discrimination: Perfect price discrimination, also known as first-degree price discrimination, occurs when a monopolist is able to charge each consumer their reservation price. This means no consumer surplus exists, as each consumer pays exactly what they value the product at.
- Consumer Surplus and Producer Surplus: In this scenario, the monopolist captures all potential consumer surplus as producer surplus. Unlike in a perfectly competitive market, where consumers benefit from surplus due to uniform pricing, price discrimination ensures that the monopolist extracts the maximum willingness to pay from every consumer.
- Efficiency: While perfect price discrimination eliminates consumer surplus, it leads to an efficient allocation of resources. The monopolist produces the same quantity of goods as in a perfectly competitive market because every unit that can be sold at a price greater than or equal to marginal cost is produced. This contrasts with traditional monopoly pricing, where the monopolist restricts output to maximize profits.
- Why Other Options Are Incorrect:
- A. Perfectly competitive equilibrium price: This would result in consumer surplus, which is not the case here.
- B. More than reservation price: Buyers would not purchase at a price higher than their reservation price.
- C. Exactly marginal cost: This only happens under perfect competition, not monopoly.
In conclusion, by charging each consumer their reservation price, a perfectly price-discriminating monopolist achieves maximum profit by capturing the entire area under the demand curve, leaving no consumer surplus.