A third-degree price discriminating monopolist can sell its output either in the

Question

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should

A) have sold more output in the local market and less at the internet auction site.

B) do nothing until it acquires more information on costs.

C) have sold less output in the local market and more on the internet auction site.

D) sell less in both markets until marginal revenue is zero. E) sell more in both markets until marginal cost is zero

Explanation / Answer

Since a monopolist firm demand curve is downward sloping so its MR curve is also downward sloping, it means if the firm wants to sell more it will have to reduce the price for selling additional units.

As it can be seen in the question that monopolist firm is using third-degree price discrimination. The monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30.

Since the MR in the local market is $20 while MR in the internet auction site is $30. It means MR is more by selling on the internet compared to by selling in the local market.

It means by selling more through the internet and reducing the selling in the local markets, the firm can maximise its profit.

Therefore monopolist firm should have sold less output in the local market and more on the internet auction site.

Hence Option C is the correct answer.

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