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Questions › DSE › DSE 2013 › Q36
2 marksMicroeconomics › Monopoly and price discrimination › Welfare cost of monopolyHardabout 3 min

DSE 2013 Question 36: Monopoly and price discrimination

A basic good (a car) is produced by a monopolist at no cost; a complementary good (car audio) is produced competitively at cost ccc per unit. Let ppp be the price of the basic good. Each consumer chooses among: (i) nothing, utility 0; (ii) the basic good alone, utility v−pv-pv−p; (iii) the bundle of basic plus complementary good, utility w−p−cw-p-cw−p−c; with w>v>0w>v>0w>v>0. There are two types: Middle Class with valuations (v1,w1)(v_1,w_1)(v1​,w1​) and Rich with (v2,w2)(v_2,w_2)(v2​,w2​), where v2>v1v_2>v_1v2​>v1​ and w2−v2>c>w1−v1w_2-v_2>c>w_1-v_1w2​−v2​>c>w1​−v1​.

Find the socially efficient consumption.

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A basic good (a car) is produced by a monopolist at no cost; a complementary good (car audio) is produced competitively at cost c per unit. Let p be the price of the basic good. Each consumer chooses among: (i) nothing, utility 0; (ii) the basic good alone, utility v-p; (iii) the bundle of basic plus complementary good, utility w-p-c; with w>v>0. There are two types: Middle Class with valuations (v₁,w₁) and Rich with (v₂,w₂), where v₂>v₁ and w₂-v₂>c>w₁-v₁. Find the socially efficient consumption. (A) Rich choose (ii) and Middle class choose (i) (B) Rich choose (iii) and Middle class choose (i) (C) Rich choose (iii) and Middle class choose (ii) (D) Both Rich and Middle class choose (ii)

Also written as: A basic good (a car) is produced by a monopolist at no cost; a complementary good (car audio) is produced competitively at cost c per unit. Let p be the price of the basic good. Each consumer chooses among: (i) nothing, utility 0; (ii) the basic good alone, utility v-p; (iii) the bundle of basic plus complementary good, utility w-p-c; with w>v>0. There are two types: Middle Class with valuations (v_1,w_1) and Rich with (v_2,w_2), where v_2>v_1 and w_2-v_2>c>w_1-v_1. Find the socially efficient consumption.

Monopoly and price discrimination has come up 128 times in 7 exams since 2004.

What this question tests

This question is on Welfare cost of monopoly, part of Monopoly and price discrimination in Microeconomics.

The deadweight loss from monopoly pricing and how it compares with competition.

TestStop has 12 past-paper questions on this subtopic.

Practise Monopoly and price discriminationMore on Welfare cost of monopoly

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