The diagram below shows the demand, marginal cost, and marginal revenue curves for a monopolist. Redraw the diagram for yourself to be able to answer the following questions.

a. If the monopolist charges its single profit-maximizing price, show what areas are consumer surplus and producer surplus.
b. Now suppose the industry is perfectly competitive and the industry supply curve is given by the MC curve. What areas would be consumer and producer surplus in this case?
c. Use the concept of surplus to explain the economic argument against monopoly and in favour of competition.
d. Consider again the situation of monopoly, but now assume the firm can perfectly price discriminate€” that is, it can charge a different price for every unit of the good. What areas now represent consumer and producer surplus?
e. Does the possibility of perfect price discrimination lead you to change your argument from part (c)? Are there considerations other than allocative efficiency that might be important here?

Transcribed Image Text:

Dollars per Unit 5 1