A monopoly has a marginal cost of zero and faces two groups...

A monopoly has a marginal cost of zero and faces two groups of consumers. At first, the monopoly could not prevent resale, so it maximized its profit by charging everyone the same price, $p=\$ 5 .$ No one from the first group chose to purchase. Now the monopoly can prevent resale, so it decides to price discriminate. Will total output necessarily expand? Why or why not? What happens to profit and consumer surplus?

Transcript

00:01 So i'm going to start by sketching this situation, right? we have the first group of consumers, quantity and price.

00:09 They have some demand curve, and that demand curve induces some marginal revenue curve.

00:15 And at that point, we must have had that the optimal price was five, right? optimal price was five.

00:24 So let's draw now the second group of consumers.

00:28 At a price of five, the company was not worried about resale, right? and here it would be the profits, right? this was the profit from the first market because the marginal cost is zero.

00:42 So revenue is equal to profit.

00:45 Now, it must be the case that the demand over here looks something like this, right? because the demand has to start below five to prevent resale, right? if the demand was greater than five, there would be a resale concern because some people might go, over there and buy it, right? right? so, because remember, no one from the first group agreed to purchase.

01:11 So this group must be strictly below five, right? because otherwise, they would be buying some of it.

01:15 They would have been involved.

01:17 Now, however, this demand curve induces a marginal revenue curve, right? and that marginal revenue curve is going to induce a price that is less than five and we'll add to profit, right? add to profit.

01:37 So here, output must expand, must expand, because marginal revenue is greater than zero for the low demand group...

Question

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