Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 9] PRICE AND OUTPUT UNDER PURE MONOPOLY 235
(b) With first-degree price discrimination, this monopolist’s TR would be $54 as given by area ABCO in Fig. 9-25.
This represents the maximum total expenditure that consumers (faced with an all-or-nothing offer) are willing
to make to get six units of this commodity rather than forgo entirely the consumption of this commodity. If we
assume that the MU of money is constant, the consumers’ surplus is $18 and is given by the area of triangle
ABF in Fig. 9-25. Thus, by practicing first-degree price discrimination, the monopolist can extract from consumers
the entire consumers’ surplus. First-degree price discrimination is rare in the real world. To practice it,
a monopolist must have exact knowledge of the D curve he or she faces and charge exactly the maximum
amount that consumers are willing to pay for the quantity the monopolist wants to sell.
(c) The monopolist’s TR would be $45 and he or she would take one half of the consumers’ surplus. This is one
way of practicing second-degree price discrimination. Second-degree price discrimination is fairly common in
the real world. For example, a telephone company may charge 7¢ per call for the first 50 calls and 5¢ per call
for the next 25 calls, and so on. Usually, companies supplying electricity, water, and gas also practice seconddegree
price discrimination.
9.25 In order for the monopolist to find it profitable to practice third-degree price discrimination, two
conditions are necessary. What are these conditions?
Third-degree price discrimination occurs when the monopolist charges different prices for the same commodity
in different markets. One condition necessary for its occurrence is that there must be two or more markets which
can be separated and can be kept separate. If the markets cannot be kept separate, some people would purchase the
commodity in the lower-priced market and undersell the monopolist in the higher-priced market, until the prices of
the commodity in the two markets were equalized. They would thus undermine the monopolist’s attempts to set
different prices in different markets.
Another condition required in order for third-degree price discrimination to be profitable is that the coefficients
of price elasticity of demand (e) in these two or more markets must be different. (If the coefficient of price elasticity
of demand is the same in all markets, then the best price to charge is the same in all markets.) When these two conditions
hold, then by distributing the best level of output among the various markets in such a way that the last unit
sold in each market will give the same MR (and charging the prices indicated by the demand curves in the various
markets), the monopolist will increase TR and total profits (over what they would be in the absence of price
discrimination).
9.26 A monopolist, selling in two separate markets (market 1 and market 2), faces the following D functions:
QD 1 ¼ 24 2 2P and QD 2 ¼ 16 2 P. The monopolist operates a single plant with LTC as in
Table 10.16. (a) Find the LMC and the LAC schedules for this monopolist. (b) On the same set of
axes, plot D 1 ,MR 1 ,D 2 ,MR 2 , P MR, LMC, and LAC. (c) Find the best level of output for the monopolist;
how much of this output should the monopolist sell in market 1 and in market 2? (d ) At what price
should the monopolist sell in each market? Check your results by using the formula. (e) How much
profit will the monopolist make in market 1, in market 2, and in total?
Table 9.16
Q 10 11 12 13 14 15
LTC ($) 82.50 88 94.50 104 119 142.50
(a)
Table 9.17
Q LTC ($) LMC ($) LAC ($)
10 82.50 P 8.25
11 88.00 5.50 8.00
12 94.50 6.50 7.875
13 104.00 9.50 8.00
14 119.00 15.00 8.50
15 142.50 23.50 9.50