A price-discriminating monopolist sells in two separate markets such that goods sold in one market are never resold in the other. It charges p₁ = $5 in one market and p₂ = $10 in the other market. At these prices, the price elasticity in the first market is -1.40 and the price elasticity in the second market is -0.10. Which of the following actions is sure to raise the monopolist's profits? A) Lower p₂. B) Raise p₂. C) Raise p₁ and lower p₂. D) Raise both p₁ and p₂. E) Raise p₂ and lower p₁.

Question

Quizplus · Accepted Answer

The monopolist should raise p₂ because the demand in the second market is inelastic (elasticity of -0.10), meaning that an increase in price will lead to a proportionally smaller decrease in quantity demanded, thus increasing total revenue and potentially profits.

A Price-Discriminating Monopolist Sells in Two Separate Markets Such That