The inverse demand curve for a firm with market power is P = 60 - Q, and its marginal cost is given by MC = 2Q. If the firm decides to practice first-degree price discrimination, the deadweight loss will:
A) decrease from $37.50 to $0.
B) decrease from $45 to $15.
C) increase from $0 to $65.
D) increase from $30 to $45.

Question

Quizplus · Accepted Answer

First-degree price discrimination means the firm charges each consumer the maximum they are willing to pay, capturing all consumer surplus and eliminating deadweight loss. Initially, there may be deadweight loss due to the firm not producing where P = MC if it were setting a single price for all units. By moving to first-degree price discrimination, the firm expands output to where P = MC for each unit, thus eliminating any deadweight loss.

The Inverse Demand Curve for a Firm with Market Power