Suppose a monopoly's inverse demand curve is P = 100 -Q,it produces a product with a constant marginal cost of 20,and it has no fixed costs.How much more or less is the deadweight loss if the monopoly can practice perfect price discrimination compared to it practicing uniform pricing?
A) The deadweight loss is smaller by 800.
B) The deadweight loss is greater by 800.
C) The deadweight loss is smaller by 1600.
D) The deadweight loss is greater by 1600.

Question

Quizplus · Accepted Answer

Under uniform pricing, the monopoly's profit-maximizing output is determined by setting MR=MC,
MR=100-2Q
MC=20
100-2Q = 20
Q=40
P=100-40=60
Total surplus= (1/2)(60-20)(40)=800
Under perfect price discrimination, the monopoly captures all the surplus by charging each individual customer the maximum 
amount they are willing to pay.
Therefore, output is determined by setting MC=MB, where MB is the maximum willingness to pay of the buyers.
The demand curve becomes the marginal revenue curve, so MR=MB.
MB=100-Q
20=100-Q
Q=80
P=100-80=20
Total surplus=0
Deadweight loss under uniform pricing = 800
Deadweight loss under perfect price discrimination = 0
The difference is 800, so the deadweight loss is smaller by 800 when the monopoly practices perfect price discrimination.

Suppose a Monopoly's Inverse Demand Curve Is P = 100