Question

Suppose a monopolist is able to segment its market into 2 consumer groups based upon known differences in willingness to pay. Group A's demand function is given by P = 90 - 0.5Q and Group B's demand function is given by P = 70 - 2Q. In addition, the marginal cost of producing and selling a unit to Group A is the same as the marginal cost of producing and selling a unit to Group B. Specifically, MC = 10. If the firm practices second degree (or multi-market) price discrimination, then total profit will be maximized by:

1) selling Q = 80 units at a price of P = 50 to members of Group A
2) selling Q = 160 units at a price of P = 10 to members of Group A
3) selling Q = 15 units at a price of P = 40 to members of Group B
4) selling Q = 30 units at a price of P = 10 to members of Group B

Answer 1

To maximize total profit, a monopolist using second-degree price discrimination will set quantities where marginal revenue equals marginal cost for each segment, then choose prices where total revenue exceeds total costs, ensuring profits.

Step-by-step explanation:

When a monopolist is able to segment its market into different groups, it will aim to maximize profit by setting different prices for each group based on their willingness to pay. This is known as second-degree or multi-market price discrimination.

To maximize total profit, the firm will equate marginal revenue (MR) to marginal cost (MC) for each consumer group. The marginal cost of producing and selling a unit is given as MC = 10 for both groups A and B. For Group A, with a demand function of P = 90 - 0.5Q, and Group B, with a demand function of P = 70 - 2Q, we have to find the quantity (Q) that will maximize profit when MR = MC in each group, and then determine the highest total profit by examining the revenue at these quantities minus the total cost.Without the exact calculations provided in the answer choices, it’s not possible to determine the exact quantity and price that will maximize profits. However, it is worth noting that the profit-maximizing quantities would generally result in a price that is higher than marginal cost, to ensure economic profits are realized.