CFA Level I · CFA Level I Exam · The Firm and Market Structures
A firm with market power charges different consumers different prices for the same product, with each consumer charged the maximum amount he or she is willing to pay. Compared with a single-price monopolist, this perfect price discrimination most likely results in:
Perfect price discrimination leaves no consumer surplus because every buyer pays their full willingness to pay. The firm expands output to where price equals marginal cost, so the efficient quantity is produced and deadweight loss disappears, while producer surplus is at its maximum.
- Ahigher consumer surplus and a deadweight loss
- Bno consumer surplus and no deadweight lossCorrect
- Clower producer surplus and no deadweight loss
Explanation
Under perfect price discrimination, the firm captures all consumer surplus and produces where price equals marginal cost, so output is efficient and deadweight loss is eliminated. Producer surplus rises, not falls, and consumer surplus falls to zero.
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