If a monopolist faces an inverse demand curve, p(y)=100 - 2y and has constant marginal costs of $4 and zero fixed costs and if this monopolist is able to practice perfect price discrimination, its total profits will be
A)$24.
B)$3,456.
C)$2,304.
D)$1,152.
E)$576.

Question

Quizplus · Accepted Answer

Under perfect price discrimination, the monopolist charges each customer their willingness to pay, which is given by the demand curve. In this case, the monopolist faces the demand curve: p(y) = 100 - 2y.

To maximize profits, the monopolist will produce the quantity at which marginal revenue equals marginal cost. The marginal revenue curve is twice as steep as the demand curve, with intercept equal to 100. So, the marginal revenue curve is: MR(y) = 100 - 4y.

Setting MR equal to MC, we get: 100 - 4y = 4, which implies that y = 24.

At this output level, the monopolist charges a price of: p(24) = 52.

So, the monopolist's total profit is: 52*(24) - 4*(24) = 2304. The correct answer is (C).

If a Monopolist Faces an Inverse Demand Curve, P(y)=100 -