Compared to a monopolist that does not price discriminate, a price discriminator will produce an output that is capture consumer surplus, and generate deadweight loss in the market.
a) smaller; less; more
b) larger; more; more
c) larger; more; less
d) smaller; more; less
The correct answer and explanation is :
The correct answer is c) larger; more; less.
Explanation:
When comparing a monopolist who does not price discriminate to one who does, it is essential to understand how price discrimination affects output, consumer surplus, and deadweight loss.
- Output (larger):
- A monopolist who engages in price discrimination will often produce more output than a monopolist who does not price discriminate. This is because price discrimination allows the monopolist to sell at different prices to different consumers based on their willingness to pay.
- By charging higher prices to consumers with a higher willingness to pay and lower prices to those with a lower willingness to pay, the monopolist can expand production to the point where the marginal cost of production equals the marginal revenue from each individual price group.
- In contrast, a monopolist who does not price discriminate faces a single price for all consumers and maximizes profits by restricting output. This results in a lower quantity of goods produced and sold.
- Consumer Surplus (more):
- A price-discriminating monopolist captures more consumer surplus compared to a non-price-discriminating monopolist. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
- With price discrimination, the monopolist extracts more of the consumer surplus by charging different prices based on individual willingness to pay. Essentially, the monopolist can “capture” what would have been consumer surplus as additional profits, leading to a reduction in consumer surplus overall but a larger share of it being captured by the monopolist.
- Deadweight Loss (less):
- Deadweight loss occurs when the market is not operating at an efficient level—typically because of restricted output and prices above the marginal cost.
- Price discrimination can reduce deadweight loss because the monopolist is able to serve more consumers at different price points. This brings the market closer to a competitive level of output, where goods are sold to all consumers whose willingness to pay is above the marginal cost of production.
- In contrast, a non-price-discriminating monopolist produces less output and charges a higher price, leading to higher deadweight loss as fewer consumers are served, and some of the potential gains from trade are lost.
Thus, compared to a monopolist who does not price discriminate, a price-discriminating monopolist typically produces larger output, captures more consumer surplus, and creates less deadweight loss.