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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

A monopolist sells in two separable markets at the same constant marginal cost of Rs 30. At the profit-maximising outputs, price elasticity of demand is 2 in Market A and 4 in Market B. Using MR = P(1 - 1/e), what are the prices charged?

Market A price is Rs 60 and Market B price is Rs 40. Equating marginal revenue to marginal cost of Rs 30 in each market gives P = 30/(1 - 1/2) = 60 and P = 30/(1 - 1/4) = 40. The less elastic market pays the higher price.

  1. AMarket A Rs 60 and Market B Rs 40Correct
  2. BMarket A Rs 40 and Market B Rs 60
  3. CMarket A Rs 45 and Market B Rs 45
  4. DMarket A Rs 60 and Market B Rs 120

Explanation

Set MR = MC = 30 in each market. Market A: P(1 - 1/2) = 30, so P = Rs 60. Market B: P(1 - 1/4) = 30, so P = Rs 40. The market with less elastic demand gets the higher price; reversing the prices is the common error. Equal prices would ignore elasticity differences.

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