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 = $2 in one market and p₂ = $8 in the other market.At these prices, the price elasticity in the first market is -2.20 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 both p₁ and p₂. D)Raise p₁ and lower p₂. E)Raise p₂ and lower p₁.

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To maximize profits, a monopolist should produce where marginal revenue equals marginal cost. However, because the monopolist is price discriminating, it should set a higher price in the market with the more inelastic demand (i.e. the market with a smaller absolute value of price elasticity) and a lower price in the market with the more elastic demand (i.e. the market with a larger absolute value of price elasticity). In this case, since the price elasticity in the second market is smaller than that in the first market (i.e. the demand is more inelastic in the second market), the monopolist should charge a higher price in the second market than in the first market. Therefore, the monopolist should raise p₂ to increase profits. Lowering p₂ would decrease profits because the monopolist would be charging a lower price in the market with more inelastic demand. Raising both p₁ and p₂ would be unnecessary and could even decrease profits if the increase in price drives away too many customers. Raising p₁ and lowering p₂ would also decrease profits because the monopolist would be charging a lower price in the market with more inelastic demand. Finally, raising p₂ and lowering p₁ would not necessarily increase profits because it depends on the degree of price elasticity in each market relative to the price changes.

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