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CA Foundation · Business Economics · Price Determination in Different Markets

A monopolist sells in two separate markets with demand P1 = 100 - 2Q1 and P2 = 60 - Q2. Marginal cost is constant at ₹20. Under third-degree price discrimination, what prices will it charge in Market 1 and Market 2?

The monopolist charges ₹60 in Market 1 and ₹40 in Market 2. Setting each market's MR equal to MC of ₹20 gives 20 units in each market, and the demand curves give prices of ₹60 and ₹40 respectively.

  1. A₹60 in Market 1 and ₹40 in Market 2Correct
  2. B₹40 in Market 1 and ₹60 in Market 2
  3. C₹50 in Market 1 and ₹40 in Market 2
  4. D₹60 in Market 1 and ₹20 in Market 2

Explanation

Market 1: MR1 = 100 - 4Q1 = 20, so Q1 = 20 and P1 = 100 - 40 = 60. Market 2: MR2 = 60 - 2Q2 = 20, so Q2 = 20 and P2 = 60 - 20 = 40. Check: elasticities are 3 and 2 respectively, so P(1-1/e) = 40 = MC... both give MR of 20. The price is higher in the market with less elastic demand.

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