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Engage in third-degree price discrimination

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Suppose a monopolist faces two market segments, domestic and overseas, and has a constant marginal cost of $5 in each market segment (assume there are no fixed costs). The demand curve for domestic segment is Q1 = 30 - P1. The demand curve for overseas segment is Q2 = 110 - P2.

In each equation, Q denote the quantity demanded and P denotes the price per unit of output.

a) Assume that it is illegal for the firm to price discriminate, so that it can charge only a single price on both markets. What price will it charge, and what profits will it earn?

b) Suppose the firm can engage in third-degree price discrimination, what price should it set on each market segment to maximize its profit? What profits will it earn?

c) Suppose now that the firm can engage in perfect first-degree price discrimination. How large will the producer surplus be? Is there a deadweight loss with first-degree price discrimination? Compare this deadweight loss with the ones in part (a) and (b).

d) Now suppose that this firm faces the aggregate market demand Q = 140 - 2P, and it can engage in second-price discrimination. More specifically, it charges $50 for the first 40 units, then $30 for any additional unit. Calculate producer surplus, consumer surplus, and deadweight loss.

Reference no: EM131515650

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