Question

1)A price discriminating monopolist sells in two separate markets such that goods sold in one market are never resold in the other. It charges $5 in one market and $7 in the other market. At these prices, the absolute value of price elasticity in the first market is .5 and the absolute value of price elasticity in the second market is 1.3. How can the monopolist raise the profit for sure? Please write every possible way. (Raise or Lower price in the first market or the second market or both markets?)

2) In problem 1), what if the production cost is zero? Please write every possible way.

Answer 1

Answer 1:

Since the price elasticity of demand is lower in first market and higher in second market, the price discriminating monopolist should charge a higher price in the market where price elasticity of demand is lower as compared to the market where price elasticity of demand is higher. Thus, the monopolist should increase prices in first market and reduce price in second market in order to earn more profits.

Answer 2:

Even when the production cost is zero, the monopolist can earn higher profit by price discriminating and thus should charge higher price in the market with a lower price elasticity of demand and should decrease prices in the market with higher price elasticity of demand in order to earn more profits.