Statement 1: “The sum of consumer and producer surpluses is maximized under both monopoly and perfect competition.”
Statement 2: “All else being equal, a monopolist that practices price discrimination will be more allocatively efficient than a single-price monopolist.”
With respect to these statements:
A. Both are correct.
B. Both are incorrect.
C Only one is correct.
The answer is C. I dont know the reason behind second statement that why is it correct, can anyone please explain this?
2.) Employment contracts with automatic increases based on the Consumer Price Index fail to increase wages in line with the cost of living because of biases in the price index. This is a wrong statement as per the answer but i dont understand the statement itself, it’d be highly appreciated if someone takes some pain explaining all these things.
In a single-price monopoly, there will be deadweight loss; a monopoly that practices price discrimination will be able to capture some or all of that deadweight loss (for themselves).
The statement is saying that the CPI is a poor measure of the cost of living because of inherent biases: maybe its mix of goods doesn’t represent a realistic average mix of consumer purchases (too much cat food, too little light beer).
There may be a little deadweight loss if the price discrimination isn’t perfect, but it will be a lot smaller than the deadweight loss with a single price.