CA Foundation · Business Economics · Price Determination in Different Markets
Under price discrimination of the third degree, a monopolist sells in two separate markets with the same marginal cost. To maximise profit, the monopolist should:
The monopolist should equalise marginal revenue across both markets and set it equal to marginal cost. This allocates output optimally between the markets, and results in a higher price in the market where demand is less elastic.
- ACharge the higher price in the market with the more elastic demand
- BEqualise marginal revenue in both markets and set it equal to marginal costCorrect
- CCharge the same price in both markets to avoid consumer resentment
- DEqualise the prices in both markets and set price equal to marginal cost
Explanation
Profit is maximised when MR in each market equals the common MC, so MR1 = MR2 = MC. Since MR = P(1 - 1/e), the market with less elastic demand ends up with the higher price. Option A reverses this relationship.
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