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Price discrimination vs. perfectly competitive market

1. Suppose a monopolist could perfectly price discriminate (i.e., this would be 1st degree price discrimination). Compare the consumer surplus, producer surplus, and total surplus in this situation to those same measures in a perfectly competitive market.

2. In a large number of cities around the world, the local, tax-supported fire department has a monopoly on putting out fires. Suppose the mayor of your town believes monopolies are bad. He proposes to eliminate the fire department and have the market assume control.

Briefly, but with some detail, outline what the mayor must mean by having the market assume control (the more specific, the better). Then briefly discuss the merits of having a monopoly in charge and the merits of having the market put out fires. It might be helpful to answer this question by setting up a simple example. For instance, imagine that you live in a residential neighborhood of the city in question and your house begins to smolder. Assume that you are unable to put the fire out yourself-you need some help.

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1. If a monopoly could do perfect discrimination, that is, each buyer pays its full reservation price, then the producer will extract all the consumer surplus. There will not be any deadweight loss. Consumer surplus will be 0 and producer surplus will be maximized in order to get get the seller maximum profits. This is allocative efficiency. On the other hand, in perfect competition, consumer surplus is ...

Solution Summary

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