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corie corie
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Posts: 767
6 years ago
Internet service in the local market is supplied by Laura's Internet Service.  The demand is
QD = 6,500 - 100P  P = 65 - 0.01Q.  Laura's marginal cost function is           
   MC(Q) = 6.67 + 0.0067Q       
If Laura practices first-degree price discrimination, what are consumer surplus and Laura's producer surplus in this market?  Does Laura's market power and first-degree price discrimination result in reduced societal welfare?
Textbook 
Microeconomics

Microeconomics


Edition: 8th
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6 years ago
If Laura can first-degree price discriminate, she will charge the highest price each consumer is willing-to-pay.  This implies she will continue selling units until the price of the last unit sold equals her marginal cost.            
   P = 65 - 0.01Q = MC = 6.67 + 0.0067Q
Therefore Q = 3,492.8   
Producer surplus is 
   PS = (0.5)(65 - 6.67)(3,492.81) = 101,867.80
Since the price of the last unit sold is equal to the marginal cost, Laura's output level is efficient.  However, since Laura is first-degree price discriminating, consumer surplus is zero.  Social welfare in this market structure is as high as possible given the efficient level of units are produced.
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