Author Question: Price discrimination allows a monopolist to increase his or her economic profits by capturing part ... (Read 47 times)

rayancarla1 · **on:** Jun 29, 2018

Price discrimination allows a monopolist to increase his or her economic profits by capturing part of the consumer surplus and turning it into economic profit.

Is the previous statement correct or incorrect? If the statement is correct, why is it important in understanding firms' behaviors? If it is incorrect, why is it incorrect?

Question 2

A firm is employing capital and labor such that the marginal product of capital is 80 and the marginal product of labor is 20 .

If the price of a unit of capital is 30 and the price of a unit of labor is 15, is the firm minimizing its costs? If not, can you recommend a change for the firm to make in its relative amounts of labor and capital used? Explain.

Rilsmarie951 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The statement is correct. The statement is important because it explains why firms want to price discriminate, namely because they can convert some of the consumer surplus into extra economic profit. Hence firms endeavor to price discriminate because if they can do so, they can increase their economic profit.

Answer to Question 2

No, the firm is not minimizing costs. The slope of its isoquant is -20/80 (-1/4) and the slope of its isocost line is -15/30 (-1/2). In order to minimize costs, the firm needs to produce where these slopes would be equal. In other words, the firm needs to produce where the slope of its isoquant is -1/2 . If the firm was to decrease its use of labor or increase its use of capital, the slope of the isoquant will rise.