Question

4. We have discussed in class that a monopolist can maximize its profit by charging different prices from two (or more) different groups of consumers. If you were a monopolist and could charge different prices for your product in domestic and foreign markets, how would you set your prices? Which market would receive a larger quantity of your product? Explain carefully how you would make this decision. Make sure to discuss the rationale behind it.

Answer 1

If I were a monopolist, I would definitely chare different prices in different markets. I would use the concept of extracting maximum consumer surplus by charging prices using the concept marginal revenue equals marginal cost. In both the markets, prices should be set at the point MR - MC. This will help maximize not only profits but also capture both markets in maximum possible way on an aggregate level. This will help capture consumer surplus in both the markets and maximize profits. Domestic market would receive a larger quantity of product since MC of supplying goods is lower in domestic market and thus prices would be lower. The rationale behind MR MCconcept isthat profits are maximized where TR-TC is maximum, which is achieved at the point MR-MC