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CFA Level I · CFA Level I Exam · The Firm and Market Structures

A monopolist practices perfect (first-degree) price discrimination, charging each customer the maximum price that customer is willing to pay. Compared with a single-price monopolist in the same market, the perfectly discriminating monopolist most likely produces:

The perfectly discriminating monopolist produces more output, up to where price equals marginal cost. Because each unit is sold at its own willingness to pay, marginal revenue equals price, so the deadweight loss disappears while the monopolist captures nearly all consumer surplus.

  1. Aless output and captures less producer surplus
  2. Bthe same output but leaves consumers with more surplus
  3. Cmore output, with the output level reaching where price equals marginal costCorrect

Explanation

With perfect discrimination, marginal revenue equals the price on each unit sold, so the firm expands output until demand price equals marginal cost. This removes deadweight loss, but the firm captures essentially all consumer surplus. The other options understate output or leave consumer surplus.

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