NAMA:JANUARIL AKBAR

NIM:200126543

NAMA:AIDIA NAYTIVITI

NIM:2002113331

1. Suppose a firm can practice perfect first-degree price discrimination. What is the lowest
price it will charge, and what will its total output be?
When a firm practices perfect first-degree price discrimination, each unit is sold at the
reservation price of each consumer (assuming each consumer purchases one unit). Because
each unit is sold at the consumer’s reservation price, marginal revenue is simply the price at
which each unit is sold, and thus the demand curve is the firm’s marginal revenue curve. The
profit-maximizing output is therefore where MR  MC, which is the point where the marginal
cost curve intersects the demand
curve. Thus the price of the last unit sold equals the marginal cost of producing that unit, and the
firm produces the perfectly competitive level of output.

for clarity, we manifest it in the form of an example

Assume that the monopolist has 3 buyers, each with the following detailed reservation prices:

1st buyer: Rp10

2nd buyer: IDR 7
3rd buyer: IDR 5
To maximize profit, the firm will produce output when marginal income equals marginal cost.
Assume that the profit-maximizing output is 4 units. At this level of output, the firm sets a price
of Rp3.

The firm will not produce more than 4 units of output because the loss due to marginal costs is
higher than marginal income. Conversely, by producing output of less than 4 units, the
company's profits are less than optimal.

In the above case, the company should have set a market price of Rp. 3. But, being the sole
producer, the firm can increase profits by imposing price discrimination.

Say, the company knows the price of the buyer's third reservation. In this case, first degree price
discrimination occurs when the company charges Rp. 10, Rp. 7 and Rp. 5 to each buyer.

If there is no price discrimination, the first buyer's consumer surplus is IDR 7. It represents the
difference between the reservation price and the market price, which is IDR 10-IDR 3. In other
words, a surplus arises because the market price is lower than the reservation price.

However, due to price discrimination, the company charges Rp. 10 to the first buyer. As a result,
a surplus of Rp7 was lost and she was unable to enjoy the lower market price. On the other hand,
the surplus becomes the company's profit.

Likewise, the consumer surpluses for the second and third buyers are IDR 4 (IDR 7-IDR3) and
IDR 2 (IDR 5-IDR3, respectively). However, due to price discrimination, neither of them
enjoyed a surplus. Manufacturers extract them into profit.
5. A monopolist is deciding how to allocate output between two geographically
separated markets (East Coast and Midwest). Demand and marginal revenue
for the two markets are:
P1  15  Q1 MR1  15  2Q1

P2  25  2Q2 MR2  25  4Q2

The monopolist’s total cost is C  5  3(Q1  Q2 ). What are price, output, profits,
marginal revenues, and deadweight loss (i) if the monopolist can price
discriminate? (ii) if the law prohibits charging different prices in the two regions?

(i) Choose quantity in each market such that marginal revenue is equal to marginal
cost. The marginal cost is equal to 3 (the slope of the total cost curve). The
profit-maximizing quantities in the two markets are:
15  2Q1  3, or Q1  6 on the
East Coast, and 25  4Q2  3,
or Q2  5.5 in the Midwest.
Substituting into the respective demand equations, prices for the two markets are:
P1  15  6  $9, and P2  25  2(5.5)  $14.
Noting that the total quantity produced is 11.5, profit is
  9(6)  14(5.5)  [5  3(11.5)]  $91.50.
When MC is constant and demand is linear, the monopoly deadweight loss is
DWL  (0.5)(QC  QM)(PM  PC ),

where the subscripts C and M stand for the competitive and monopoly levels,
respectively. Here, PC  MC  3 and QC in each market is the amount that is
demanded when P  $3. The deadweight losses in the two markets are
DWL1  (0.5)(12  6)(9  3)  $18, and
DWL2  (0.5)(11  5.5)(14  3)  $30.25.
Therefore, the total deadweight loss is $48.25.