CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market
A monopolist sells the same product in two separate markets, charging a higher price where demand is less elastic. Profit is maximised when:
Profit is maximised when marginal revenue in each market equals the common marginal cost of production. Because MR depends on price elasticity, the market with less elastic demand ends up with the higher price, so prices are not equalised.
- APrices in both markets are equalised
- BPrice is equal to marginal cost in each market
- CTotal revenue is maximised in each market
- DMarginal revenue in each market equals the common marginal costCorrect
Explanation
Under third-degree price discrimination, the monopolist allocates output so that MR1 = MR2 = MC. Since MR = P(1 - 1/e), the market with lower elasticity gets the higher price. Equal prices would ignore the elasticity difference, and P = MC is a competitive rule.
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