In first degree price discrimination, monopolist takes away :
A. All of the consumer surplus
B. All of the producer surplus
C. Some part of the consumer surplus
D. None of them
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Correct Answer : A.
First Degree Price Discrimination This first type of product pricing is based on the sellers ability to determine exactly how much each and every customer is willing to pay for a good. Different consumers have different preferences and levels of purchasing power and thus the amount they would be willing to pay for a good often exceeds a single competitive price. This difference between what a consumer is willing to pay and the price actually paid is known, of course, as consumers surplus. Thus a firm engaging in first degree price discrimination is attempting to extract all the consumers surplus from its customers as profits. The seller will take the time to bargain or 'haggle' with the customer about the price that customer is willing to pay - some buyers willing to pay a higher price other buyers a lower price. The firm will sell a quantity of output 'Q*' up to the point where the price of the last unit sold just covers the marginal costs of production. The difference between the price charged on each unit and the average costs of producing 'Q*' units of output will be the firm's profits. Figure 2, First Degree Price Discrimination
Common examples of first degree price discrimination include car sales at most dealerships where the customer rarely expects to pay full sticker price, scalpers of concert and sporting-event tickets, and road-side sellers of fruit and produce.