Question

1. Monopoly and price discrimination: (a) What is the profit maximization condition for a (single-price) monopolist in the short-run? How about in the long-run? Is it efficient to have monopoly in the society? Why or why not? When does the government allow monopoly? (b) If a monopolist is allowed to price-discriminate, what are the three broad categories of discrimination? Explain each one of them with example.

Answer 1

Like other market firms, the monopoly firm also achieves the equilibrium meeting the following conditions.

• The MC=MR
• The MC must cut MR from bellow.

In short run, firm earns profit meeting above conditions and charging price greater than MC

In long run monopoly firm earns supper normal profits by reducing the supply and charging the price greater than MC

In the long run, the monoply market is not efficient because firm charges higher prices and produces output level where not optimum level.This leads to efficiency because resource is not optimally utilized

The government allows monopoly firm certain expedition case example the electric power generation corporation generally in the hands of the government to regulate the activities for the welfare of the people here it is not profit motive but welfare motives pf the government.

B) Price discrimination is the situation where charging not uniform charge to the consumers.

• First-degree price discrimination charging the consumer to maximum price that they are willing to pay.
• Second-degree price discrimination where charging the different price for consumers. Example Doctor may charge the high price for the rich patient but the same treatment he may charge the low price.
• Third-degree price discrimination refers to situation charging a different price for particular groups example special discount price for the student in particular picnic place.