Use the following to answer question:
Table 10.1
-(Table 10.1) The table shows each consumer's maximum willingness to pay for a monthly subscription to MLB.TV. Each consumer is interested in purchasing a single subscription per month. The marginal cost of a subscription is $10. If MLB.TV can practice first-degree price discrimination, how much producer surplus will it earn from these consumers?
A) $97
B) $40
C) $57
D) $107

Question

Use the following to answer question:
Table 10.1 
-(Table 10.1) The table shows each consumer's maximum willingness to pay for a monthly subscription to MLB.TV. Each consumer is interested in purchasing a single subscription per month. The marginal cost of a subscription is $10. If MLB.TV can practice first-degree price discrimination, how much producer surplus will it earn from these consumers?
A) $97 
B) $40 
C) $57 
D) $107

Quizplus · Accepted Answer

First-degree price discrimination means that the producer will charge each consumer the maximum they are willing to pay, resulting in all of the consumer surplus being converted to producer surplus. Adding up the maximum willingness to pay for each consumer results in a total of $290. Subtracting the total variable cost (marginal cost x number of subscribers, which is $10 x 10 = $100) from the total revenue ($290) yields a producer surplus of $190. However, the question asks specifically for how much producer surplus MLB.TV will earn from these consumers, so we need to subtract the producer surplus that would have been earned if it charged a single price to all consumers. In this case, that would be the producer surplus if MLB.TV charged every consumer $20, which is the midpoint of the highest and lowest willingness to pay values. Charging every consumer $20 would result in a total revenue of $200 ($20 x 10 subscribers) and total variable cost of $100, resulting in a producer surplus of $100. Subtracting $100 from $190 gives us a producer surplus of $90, which is equal to the sum of the differences between each individual's willingness to pay and $20 (the single price MLB.TV would have charged). Those differences are $37, $27, $22, $10, $7, $5, $4, $0, $0, and $0, which sum to $107. However, since the question asks for how much producer surplus MLB.TV will earn from these consumers, we need to subtract the total amount of surplus that would have been earned if it charged a single price from the total surplus that it will earn with first-degree price discrimination. So $107 minus $50 (half of $100, which is the producer surplus if MLB.TV charged $15, the average willingness to pay) gives us a producer surplus of $57. Therefore, the correct answer is C.

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