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CFA Level I · CFA Level I Exam · The Firm and Market Structures

A monopolist sells the same product to two separate groups of customers that cannot resell to each other. Group X has a less elastic demand than Group Y. To maximize profit, the monopolist would most likely:

The monopolist would charge Group X, the less elastic group, a higher price. Profit maximization requires equal marginal revenue across segments, and marginal revenue is closer to price when demand is less elastic, so the less price-sensitive group pays more.

  1. Acharge both groups the same price equal to marginal cost
  2. Bcharge Group X a higher price than Group YCorrect
  3. Ccharge Group Y a higher price than Group X

Explanation

Under third-degree price discrimination, the firm equates marginal revenue in each segment with marginal cost. Since MR = P(1 − 1/|elasticity|), the less elastic group has a higher price at the same MR. Charging Group Y more reverses this relationship.

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