A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits? A) P_A = P_B = MC. B) MR_A = MR_B. C) MR_A = MR_B = MC. D) (MR_A - MR_B) = (1 - MC).

Question

Quizplus · Accepted Answer

In third-degree price discrimination, the firm sets different prices for different groups of consumers based on their price elasticity of demand. To maximize profits, the firm should produce where marginal revenue equals marginal cost in each market (MR1U1B1AS1U1B0 = MC and MR1U1B1BS1U1B0 = MC) and charge a price that corresponds to the demand curve in each market (P1U1B1AS1U1B0, P1U1B1BS1U1B0). Therefore, the best choice is C, where the firm sets prices in each market based on the respective market's demand curve and produces where marginal revenue equals marginal cost in each market. This strategy ensures that the firm maximizes its profits in both markets.

A Firm Sells an Identical Product to Two Groups of Consumers