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 = 3,200 - 400p₂, then the price in the United States will A)be smaller than the price in England by $1. B)be larger than the price in England by $3. C)equal the price in England. D)be larger than the price in England by $1. E)be smaller than the price in England by $3.

Question

Quizplus · Accepted Answer

To maximize profits, the monopolist should charge a price at which the marginal revenue equals the marginal cost. In other words, MR=MC. For the U.S. market, the inverse demand function is p₁ = 10 - 0.0014Q₁. Taking the derivative of this with respect to Q, we get the marginal revenue function, MR1 = 10 - 0.0028Q₁. Setting this equal to the marginal cost of $2, we get 10 - 0.0028Q₁ = 2, which simplifies to Q₁ = 2857.14. Plugging this back into the inverse demand function gives us p₁ = 6.00. For the English market, the process is the same except we use the inverse demand function p₂ = 5 - 0.00125Q₂, which gives us a price of p₂ = 4.00. Therefore, the price in the United States will be larger than the price in England by $2, which is answer choice D.

A Monopolist Has a Constant Marginal Cost of $2 Per