Suppose a monopoly sells to two identifiably different types of customers,A and B,who are unable to practice arbitrage.The inverse demand curve for group A is P_A = 10 - Q_A,and the inverse demand curve for group B is P_B = 18 - Q_B.The monopolist is able to produce the good for either type of customer at a constant marginal cost of 2,and the monopolist has no fixed costs.If the monopolist practices group price discrimination,the profit-maximizing prices charged to each type of customer are A) P_A = 6, and P_B = 10. B) P_A = 4 and P_B = 8. C) P_A = 10, and P_B = 6. D) P_A = 8, and P_B = 4.

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Quizplus · Accepted Answer

To find the profit-maximizing prices for each group, we use the formula for the monopoly pricing: P = MC + (1/|E|) * (P - MC), where P is the price, MC is the marginal cost, and |E| is the price elasticity of demand. Given that the monopolist can perfectly price discriminate between the two groups and the marginal cost (MC) is 2, we calculate the midpoint price for each demand curve, which maximizes profit by equating marginal revenue (MR) to marginal cost. For group A, the optimal price is calculated as halfway between the intercept of the demand curve (10) and the marginal cost (2), resulting in a price of 6. Similarly, for group B, the optimal price is halfway between the intercept of the demand curve (18) and the marginal cost (2), resulting in a price of 10. This approach simplifies the calculation by assuming linear demand curves and constant marginal cost, leading to the conclusion that the profit-maximizing prices are 6 for group A and 10 for group B.

Suppose a Monopoly Sells to Two Identifiably Different Types of Customers,A