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Consider a profit-maximising firm that has the good fortune of being a monopolist. The firm sells output in a domestic market and exports to a foreign market as well. The domestic market demand curve given as

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Answer #1

e) Since the monopolist is charging different prices for the same product in different markets, this is an example of third degree price discrimination.

f) Profits for the monopoly are given by:

20 yoVo+ (20-YFYF Vo+yF) 20 2

Using the values of as 0 and 5, we have:

YD and yF

25 20 75 12.5 - 20 42.5 2 T 015 5

g) Now,

PFPD=p

New demand is given by aggregating the individual demands in two markets:

У3D УF+ Ур 3D 20- 2р + 20 —р —у 3 40 Зр

h) The monopolist's profit is given by:

(40-yy y2 20 3 2

The monopolist's objective is to maximize profit with respect to y:

32 40-2y y 0y 8, p 3

Output in each market is given by:

32 20 2) 0, yF - 8 yD

i) The monopolist's profit for the above values of y and p is:

(8) 40 8 20 85.3 32 20 33.3 3

Profits where the monopolist is forced to charge the same price in both markets is lower than the profit when the monopolist is free to price discriminate. This gives further proof that a monopolist can increase his profit by indulging in price discrimination.

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Answer 1

e) Since the monopolist is charging different prices for the same product in different markets, this is an example of third degree price discrimination.

f) Profits for the monopoly are given by:

20 yoVo+ (20-YFYF Vo+yF) 20 2

Using the values of as 0 and 5, we have:

YD and yF

25 20 75 12.5 - 20 42.5 2 T 015 5

g) Now,

PFPD=p

New demand is given by aggregating the individual demands in two markets:

У3D УF+ Ур 3D 20- 2р + 20 —р —у 3 40 Зр

h) The monopolist's profit is given by:

(40-yy y2 20 3 2

The monopolist's objective is to maximize profit with respect to y:

32 40-2y y 0y 8, p 3

Output in each market is given by:

32 20 2) 0, yF - 8 yD

i) The monopolist's profit for the above values of y and p is:

(8) 40 8 20 85.3 32 20 33.3 3

Profits where the monopolist is forced to charge the same price in both markets is lower than the profit when the monopolist is free to price discriminate. This gives further proof that a monopolist can increase his profit by indulging in price discrimination.