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Suppose a pure monopolist sells output in two different markets [A&B]. (third-degree price discrimination!). The demand...

Suppose a pure monopolist sells output in two different markets [A&B]. (third-degree price discrimination!). The demand curves are given as: Market A: PA = 20 - .1QA Market B: PB = 10 - .1QB where PA, QA are price and quantity in Market A; and PB, QB are price and quantity in Market B. The firm's marginal cost of production, MC=$5.00 and constant (hence, MC=AC). Fixed costs are zero.

a) Determine the profit-maximizing quantity (Q) and price (P) for each market (i.e. QA & PA; and QB & PB ).

(b) How much (total) profit (or loss) does the firm make?

c) What are the benefits of ‘second-degree’ and ‘third-deg

Solutions

Expert Solution

C In the second degree price discrimination a monopolist is able to charge separate price for different blocks or quantity from buyers such as a high price for 1st block of say 10 units and lower prices for additional blocks. In this way the firm is able to sell a higher quantity with good prices.  

On the other hand a third degree price discrimination the seller divides his buyers into two or more submarkets harvesting the maximum consumer surplus.

Rahul Sunny answered 7 months ago
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