7. A firm with constant marginal cost, practicing third degree price discriminat

Question

7. A firm with constant marginal cost, practicing third degree price discrimination, will maximize profit by setting prices and output for the different demand groups such that a. marginal revenue is highest for the demand which is most elastic and that marginal revenue is equal to marginal cost. b. marginal revenue is highest for the demand which is least elastic and that marginal revenue is equal to marginal cost. marginal revenue is the same for all demand groups and that marginal revenue is equal to marginal cost. marginal revenue is maximized. Figure 4: The Coumot Model Q1 Firm 2's Reaction Curve 14 Firm 1 Reaction Curve The next 3 questions are based on Figure 4. Assume that P 50- Q and MC 0 20 Cournot equilibrium exists where a. Firm l produces 25 and Firm 2 produces 25 Firm l produces 14 and Firm 2 produces 14 c. Firm l produces 50 and Firm 2 produces 50 Firms 1 and 2 combine to produce 25

Explanation / Answer

7. a

Third degree price discrimination is the different price charging for different groups of consumers. The profit occurs at point MR=MC, the price will always be set in elastic portion of demand curve.

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