Question

Explain the difference in the profit realized under the two situations (the price in each market or in the two markets combined.) Make sure you include the profit with and without price discrimination in your answer.

Answer 1

Answer:

Here firm is facing two different markets. Firm has two options, first, charging same price in both markets and second, charging different prices from both market. If elasticity of demands are varied in two separate markets, then it is profitable to exercise price discrimination. Firm must charge higher price where demand is inelastic.

By charging separate prices in both markets, profit of firm is inflated than situation where firm charge single price.

Thus, if firm wants to maximize its profit, it must go for price discrimination.