Consider a monopolist that is able to distinguish between two distinct market segments,A and B,for its product.Marginal cost is constant at $100 for each unit produced.The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $85 and marginal revenue in segment B is $105.How can this firm maximize its profit?

Question

Quizplus · Accepted Answer

The monopolist should decrease output in segment A and increase output in segment B because the marginal revenue in segment B is higher than the marginal revenue in segment A. By decreasing output in segment A, the monopolist can increase the price and hence the marginal revenue in segment A, while the increase in output in segment B will generate higher overall profit due to its higher marginal revenue. Maintaining the current output and allocation or increasing output in both segments would not maximize profit given the different marginal revenues in each segment. Decreasing output in both segments would lead to lower total revenue and therefore lower profit.

Consider a Monopolist That Is Able to Distinguish Between Two