Price Discrimination and Demand Elasticity
A discriminating monopolist aims to maximize profits by charging different prices in different markets. The pricing strategy depends on the price elasticity of demand in each market.
Monopoly Pricing Rule
The fundamental principle for a profit-maximizing monopolist engaging in price discrimination is to charge a higher price in the market where demand is less elastic (i.e., has a lower absolute elasticity value). This is because consumers in less elastic markets are less sensitive to price changes, allowing the monopolist to extract more revenue.
Applying the Rule
In this scenario:
- Market I has a demand elasticity of $E_1 = 2$ (absolute value).
- Market II has a demand elasticity of $E_2 = 1$ (absolute value).
Comparing the elasticities, we find that $E_2 < E_1$ (since $1 < 2$). This means demand in Market II is less elastic than demand in Market I.
Conclusion on Price Behavior
Therefore, the discriminating monopolist will charge a higher price in Market II, the market with the lower price elasticity of demand.
Important Questions from Microeconomics
Which of the following statement is correct?
I. Indifference curves are sloping from left to right.
II. Higher indifference curve gives a higher level of utility.
If in a production process, all inputs are tripled, which of the following statements follows?
I. If the output is tripled, then decreasing returns to scale apply.
II. When the output is doubled, constant returns to scale apply.
III. If the output is more than tripled, then increasing returns to scale apply.
When it is not possible to make someone good without harming someone, then such a situation is called
According to Ricardo what condition is necessary to make possible international trade between two countries?
Match List I with List II:
List- I
Shape of revenue curve of the firm
List – II
Market structure
A.
Kinked revenue-curve (I)
Monopolistic competition B.
Infinitely elastic straight line curve (II)
Perfect competition C.
Relatively less elastic curve (III)
Oligopoly D.
Relatively high elastic curve (IV)
Monopoly.
Choose the correct answer from the options given below -
