A price-discriminating firm is one that can charge different buyers different prices for the same product. The difference between a monopoly and the perfect price-discriminating monopoly is best understood graphically. Where the former has diverging MR and D curves, these are collapsed in the latter. Thus, the monopoly produces too little output, while the price-discriminating monopolist produces the allocatively efficient output. It eliminates deadweight loss this way. Consumer surplus is all transferred to producer surplus, becoming part of total revenue and profit.

A perfectly price-discriminating, profit-maximizing monopolist is enjoying economic profits.

(a) Graph its marginal cost (MC), average total cost (ATC), marginal revenue (MR), and demand curves (D), labeling all.

(b) Label its profit-maximizing quantity (Q_M).

(c) What would happen to the firm's total revenue if it produced more than the profit-maximizing quantity? Explain.

(d) A local ordinance is passed that prohibits price discrimination, but the firm is still earning economic profits. Graph and label the new marginal revenue (MR₂). Label its new profit-maximizing price (P_M2) and quantity of production (Q_M2).

(e) Shade the entire area of deadweight loss.

(f) Will the change in part (d) cause the monopoly to become more or less allocatively efficient? Explain.

(g) The demand curve intersects the y-axis at $80. P_M2 is $20, and Q_M2 is 200 units. Calculate the area of gained consumer surplus.

(h) The government offers a subsidy of $5 per unit that increases the profit-maximizing quantity to 200 units. What will the total cost of the subsidy be to the government?