Question

You produce stereo components for sale in two markets, foreign and domestic, and the two

groups of consumers cannot trade with one another. If your firm practices third-degree price

discrimination to maximize profits, the marginal revenue

A) in the domestic market will equal the marginal cost.

B) in the foreign market will equal the marginal cost.

C) in the domestic market will equal the marginal revenue in the foreign market.

D) all of the above

E) none of the above

Answer 1

Third Degree Price Discrimination involves charging a different price to different groups of consumers for the same good. Also the two groups of consumers cannot trade with one another. So the firm will charge different prices in domestic and foreign markets.

Total Profit =Total Revenue- Total cost, where Total Profit=Profit in domestic market+Profit in foreign market

Firm will try to maximize the overall profit,

Hence by differenciating both side of the equation by total quantity and than putting left side = 0 which is profit maximizing condition,

we get Total marginal Revenue- Total marginal cost . Hence the answer is none of the above.