Author Question: Compare the consumer surplus in a perfect competition with that of a single-price monopoly and with ... (Read 124 times)

tatyanajohnson · **on:** Jun 29, 2018

Compare the consumer surplus in a perfect competition with that of a single-price monopoly and with a price-discriminating monopoly.

What will be an ideal response?

Question 2

Why do some firms practice price discrimination? Relate your answer to the common practice of public colleges charging lower tuition to in-state students and higher tuition to out-of-state students.

What will be an ideal response?

carlsona147 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The consumer surplus in a perfect competition is larger than the consumer surplus in a single-price monopoly. And, the consumer surplus in a single-price monopoly is larger than that with a price-discriminating monopoly. Indeed, for a monopoly able to perfectly price discriminate, there is no consumer surplus.

Answer to Question 2

Price discrimination helps businesses capture more consumer surplus and hence increase their economic profit. Basically the firm charges more to people who are willing to pay more. For a public college, out-of-state students will likely have a higher willingness to pay for attending that college because, by leaving their home state, they are demonstrating that they truly want to attend the college. If the college charged in-state residents the same tuition as out-of-state residents, the college would miss the chance to maximize revenue from each group. Charging in-state residents the same high price as out-of-state residents would lead to a massive drop in quantity demanded and thus lower total revenue. By separating their customers based on differing demand conditions, the college earns more total revenue.