Question

Suppose that a monopolist producing bicycles can divide the aggregate demand into two groups: The domestic market and the foreign market. The demand curve for the monopolist’s product in the domestic market is y₁=1200-10p₁ and the demand curve for the monopolist’s product in the foreign market is y₂=800-10p₂. The monopolist’s total cost function is given by C(y)= 50y where y=y₁+y₂.

a) Assume that the monopolist does not practice price discrimination. Calculate his/her profit-maximizing price-quantity combination and the maximum profit.

b) Assume that the monopolist practices third-degree price discrimination. Calculate his/her profit-maximizing price-quantity combination and the maximum profit in each market.

c) Check whether the third-degree price discrimination increases or decreases welfare

Answer 1

the social wlefare will rise owing to the exercise of price discrimination.