When monopolists perfectly price discriminate, they
A attempt to capture consumer surplus as profit.
B All are correct
C charge different prices to different buyers.
D can eliminate the deadweight loss to society of a monopoly.
The correct answer and explanation is :
The correct answer is B) All are correct.
Explanation:
When monopolists engage in perfect price discrimination, they attempt to capture the entire consumer surplus and convert it into profit. This behavior involves charging different prices to different buyers, depending on each individual’s willingness to pay, allowing the monopolist to maximize their profits. By perfectly price discriminating, the monopolist eliminates the standard concept of a single price for all consumers. Instead, each consumer is charged the highest price they are willing to pay, which can vary across individuals.
Let’s break down why each option is correct:
- A) Attempt to capture consumer surplus as profit:
- In a regular monopoly, consumer surplus (the difference between what consumers are willing to pay and what they actually pay) exists because the monopolist sets a price above marginal cost, leading to fewer goods being sold at a higher price. However, in perfect price discrimination, the monopolist charges each consumer the maximum they are willing to pay. By doing so, the monopolist captures all of the consumer surplus as profit, leaving no surplus for the consumers.
- C) Charge different prices to different buyers:
- Perfect price discrimination involves charging different prices for the same good based on individual demand. For example, a monopolist might charge a higher price to a consumer with a high willingness to pay (e.g., someone willing to pay $100 for a product) and a lower price to someone with a low willingness to pay (e.g., someone willing to pay $50). This pricing strategy allows the monopolist to maximize revenue and extract all the consumer surplus.
- D) Can eliminate the deadweight loss to society of a monopoly:
- In a typical monopoly, the price is higher than the marginal cost, leading to a reduction in the quantity of goods sold compared to a perfectly competitive market. This creates deadweight loss (a loss of total welfare). However, under perfect price discrimination, the monopolist sells to every consumer at their willingness to pay, meaning the monopolist can sell the efficient quantity of goods (where marginal cost equals price) and thus eliminate deadweight loss.
Hence, all of the statements in the options are true when monopolists practice perfect price discrimination.