A monopolist has a constant marginal cost of $2 per unit and no fixed costs. He faces separate markets in the United States and England. He can set one price p₁ for the U.S. market and another price p₂ for the English market. If demand in the United States is given by Q₁ = 7,000 - 700p₁ and demand in England is given by Q₂ = 1,200 - 200p₂, then the price in the United States will A) equal the price in England. B) be smaller than the price in England by $2. C) be larger than the price in England by $4. D) be larger than the price in England by $2. E) be smaller than the price in England by $4.

Question

Quizplus · Accepted Answer

To maximize profits, the monopolist should set the prices in each market where the marginal revenue equals the marginal cost. The marginal revenue for each market can be found by taking the derivative of the demand function: MR US = 700 - 1,400p₁ MR UK = 200 - 400p₂ Setting each marginal revenue equal to the marginal cost of $2, we get: 700 - 1,400p₁ = 2 p₁ = $0.497 (rounded to the nearest cent) 200 - 400p₂ = 2 p₂ = $0.495 (rounded to the nearest cent) Therefore, the monopolist should set a price of $0.497 in the U.S. market and $0.495 in the English market. The price in the U.S. market will be larger than the price in the English market by $0.002, which is rounded to $0.02 or $2. Therefore, the correct choice is D).

A Monopolist Has a Constant Marginal Cost of $2 Per