Suppose that a firm faces a demand curve for its product of The corresponding marginal revenue curve is The firm has a constant marginal cost of $4 per unit.If the firm engages in first-degree price discrimination,how much producer surplus will it capture?
A) $21.
B) $18.
C) $9.
D) $4.50

Question

Suppose that a firm faces a demand curve for its product of  The corresponding marginal revenue curve is  The firm has a constant marginal cost of $4 per unit.If the firm engages in first-degree price discrimination,how much producer surplus will it capture?
A) $21. 
B) $18. 
C) $9. 
D) $4.50

Quizplus · Accepted Answer

Under first-degree or perfect price discrimination, the firm charges each customer their maximum willingness to pay. In this case, since the marginal revenue curve is the demand curve, the firm knows the maximum willingness to pay of each customer.

Setting marginal cost equal to marginal revenue, we get:

4 = 11 - (2/71)Q

Q = 497

This means that the firm will sell 497 units at a price of $11 per unit, capturing all consumer surplus.

Producer surplus under first-degree price discrimination is equal to total revenue minus total variable cost (which is just total cost in this case since fixed costs are zero).

Total revenue = 497 x $11 = $5467

Total cost = 497 x $4 = $1988

Producer surplus = $5467 - $1988 = $3479

Dividing by the number of units sold, we get:

Producer surplus per unit = $3479 / 497 = $7

Since the firm sells each unit for $11 and incurs a variable cost of $4 per unit, its profit per unit is $7.

Suppose That a Firm Faces a Demand Curve for Its