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:

Answer 1

Answer:

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

Explanation:

Based on the scenario being described within the question it can be said that in order to maximize profits the firm should have sold less output in the local market, and more output on the internet auction site. This is because marginal revenue indicates the additional revenue that will be generated by increasing product sales by one unit. Therefore since the internet auction site's marginal revenue is higher than the local store, it means that selling more units in the internet site will lead to more profit than the local market.

Answer 2

Options:

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

Answer:

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

Explanation:

Price discrimination is not something that most firms can do, since you need to be able to set different prices depending on your customer. Monopolies are generally able to set the price of their products, and many times they are also able to carry out third degree price discrimination (sell their products at different prices depending on the customer).

In this case, if the monopoly wanted to sell more units, then it would nee to lower its prices, but since this specific monopolist is selling all its output, then what it needs to do is shift its sales channel and continue to carry out price discrimination policies since they are very efficient at doing so. Eventually if they want to sell more on the internet, they will probably have to lower their prices a little to increase internet demand, but they have a lot of room to do so. The difference in marginal revenue is quite large (50%), so even if they lower their prices a little, their total revenue should still increase.