Section B: Price Discrimination and Welfare Implications B.1-A: Primary Market: A profit-maximizing monopoly charges a single price in its primary market. The primary market demand curve is D1. For simplicity, assume that the firm has zero fixed costs and faces a constant marginal cost of $3. Given the assumption, MC = ATC = $3. Primary Market AQ D1 Unit Elastic $3 MC = ATC D1 Q 0.5v (1) Draw the firm's marginal revenue curve on the above diagram and label it as MR1. (2) Indicate on the quantity axis the profit-maximizing output quantity, and denote it as Q1. (3) Indicate on the price axis the profit-maximizing price, and denote it as P1. (4) What is the expression for the firm's profit per unit of output? Answer: (5) What is the expression for the firm's total profit? Answer: (6) Use vertical bars to shade the firm's total profit on the above diagram. (7) Given Q1 and P1, identify the area for consumer surplus and then use horizontal bars to shade the area on the above diagram. (8) Identify the portion of D1 the firm did not serve by boldfacing that portion of the line. (In red)B.1-B: Secondary Market: In the previous question B.1-A, the firm serves Q1 units and charges P1 per unit to its customers in the primary market. Now, the firm is to open up a secondary market, charging the rest of the consumers a lower price. As in the primary market, the firm seeks to maximize its profit in the secondary market operation. Primary Market Secondary Market AQ D1 BQ Unit Elastic D2 Unit Elastic MC = ATC $3 MC = ATC D1 D2 0.5v 0.5w Left Panel: (1) The left panel of the diagram depicts the primary market. Complete the left panel by repeating what you have done in the previous question (i.e., draw the MR1 line, and identify profit-maximizing Q1 and P1). At (P, Q) = (P1, Q1), there is a portion of the demand that is unserved. This portion of the demand is marked in red color in the left panel, and is transferred to the right panel for the secondary market. Right Panel: (2) As mentioned, the right panel of the diagram shows the demand curve in the secondary market, which consists of the unserved portion of the demand in the primary market. Draw the firm's marginal revenue curve in the secondary market and label it as MR2. (3) Indicate on the quantity axis the profit-maximizing output quantity in the secondary market, and denote it as Q2. (4) Indicate on the price axis the corresponding profit-maximizing price, and denote it as P2. (5) Use vertical bars to shade the firm's total profit in the secondary market. (6) Use horizontal bars to shade the area for consumer surplus in the secondary market. (7) To implement this two-price scheme, the firm decides to charge P1 to all its consumers in the primary and secondary markets, and then offer rebate coupons to the consumers in the secondary market. Write down the expression for the dollar amount of the rebate coupons. (Hint: What is the price difference between the two markets?) Answer: 9