Answer to Question #170854 in Economics of Enterprise for TOMILIN

Question

1. An industry consists of a monopolist that serves two distinct market segments. The law of one price prevails within each market, but it can charge different prices in each market. The monopolist has no fixed costs.

(a) Assume that marginal costs are zero such that e=0 and that there are no comer solutions. Suppose the respective demand curves for the monopolist's product in market 1 and 2 are given by qi(p) = as - bp and calpa) = 12 - bap?2. Under what conditions on the parameters a, by, az, and by is price discrimination not optimal for the monopolist?

(b) We now assume that marginal costs are positive and constant such that e> 0 and that there are no corner solutions. If we also assume a constant elasticity of demand function of the form (p) = up for i = 1, 2. Under what conditions is price

discrimination not optimal for the monopolist?

Answer 1

a) Price discrimination is possible under the following conditions:

-The seller must have some control over the supply of his product,

-The seller should be able to divide the market into at least two sub-markets.

-The price-elasticity of the product must be different in different markets.

therefore all the above tenet are not met hence no optimal realization by monopolist.

b) There must be a difference in price elasticities in the different markets for the product.

In monopoly, there is a single seller of a product called monopolist. The monopolist has control over price, demand, and supply decisions, thus, sets prices in a way, so that maximum profit can be earned