Many schemes for price discriminating involve some cost. For example, discount coupons take up the time and resources of both the buyer and the seller. This question considers the implications of costly price discrimination. To keep things simple, suppose that our monopolist's production costs are simply proportional to output, so that average total cost and marginal cost are constant and equal to each other.

On the following graph, use the grey point (star symbol) to indicate the price and quantity that would emerge under a monopoly without price discrimination. Then use the purple point (diamond symbol) to shade the area corresponding to the monopolist's profit, and use the green point (triangle symbol) to shade the area corresponding to consumer surplus. Finally, use the black point (plus symbol) to shade the area corresponding to deadweight loss.

Monopoly OutcomeProfit (X)Consumer Surplus (Y)Deadweight Loss (Z)Price, Cost, RevenueQuantityDemandMRMC=ATC

Let the region representing monopolist's profit be called X, consumer surplus Y, and deadweight loss Z

Suppose the monopolist can perfectly price discriminate.

The monopolist's profit is __________ in this case.

The change in the monopolist's profit as a result of price discrimination is ______, which is larger than/ the same as/ smaller than the change in total surplus as a result of price discrimination.

Now suppose that there is some cost of price discrimination. To model this cost, suppose that the monopolist has to pay a fixed cost C

to price discriminate.

Under which of the following conditions would the monopolist pay the fixed cost to be allowed to price discriminate?

A.) Y>C

B.) Y+Z>C

C.) Z>C

D.) Y+Z<C

Under which of the following conditions would a benevolent social planner, who cares about total surplus, agree to allow the monopolist to price discriminate as long as it pays the fixed cost?

A.) Z>C

B.) Y+Z<C

C.) Y+Z>C

D.) Y>C

True or False: It is possible that the monopolist will price discriminate even though doing so is not socially desired, because the monopolist has a greater incentive to price discriminate than the social planner would allow.

True

False