Draw a diagram explaining the equilibrium of a monopolistic firm discriminating price in two markets. What...

Draw a diagram explaining the equilibrium of a monopolistic firm discriminating price in two markets. What are the important conditions required for a multi-market discrimination? Write equilibrium conditions. How will you determine monopolist’s profit in this market?

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Expert Solution

Price discrimination is charging each consumer the prices that they are willing to pay for identical goods.The monopolist is in equilibrium when MR is equal to MC. The aim of price discrimination is to draw from each consumer what they can pay for the product. With perfect price discrimination the firm separates the market into each individual consumer and charge different price from them.If the market can be segmented final output will be higher at Q2 as shown in the diagram with price discrimination.

The conditions are different price elasticities of demand for different consumers so that the monopolist can charge more from consumers with inelastic demand and less from those with elastic demand.The firm should also be able to stop consumers moving away from one supplier to another.The seller should be able to divide the market to two or more sub markets.

The equilibrium condition of a monopolistic firm is MR must be equal to MC.

The monopolist will maximize profit as long as the reservation price of the buyer is higher than the monopolist's cost of production.

Rahul Sunny answered 1 year ago

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