Question

A firm has found a way of using first-degree price discrimination. Demand for its product is given by

P = 20 – 2Q

Marginal cost is constant and equal to $6.

i) With first-degree discrimination, what will be the profit-maximizing rate of output? How much economic profit will the firm earn?

ii) What will be the profit-maximizing rate of output if the firm does not discriminate and sets one price for all customers? How much economic profit will the firm earn in this case?

Answer 1

i) $P=MC$

$20-2Q=6$

$14=2Q$

$Q=7$

$Profit = TR-TC$

$Profit=P*Q-TC$

$Price = 6$

$Profit = 7*6-6*6$

Profit is $6

ii) It will be higher than $6