Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

236 PRICE AND OUTPUT UNDER PURE MONOPOLY [CHAP. 9
(b) See Fig. 9-26.
(c) This monopolist’s best long-run level of output is 11 units and is given by the point where the LMC curve
intersects the P MR curve from below. The best way to distribute this total output between the two
markets occurs when LMC ¼ P MR ¼ MR 1 ¼ MR 2 ¼ $6. Thus the monopolist should sell six units in
market 1 and the remaining five units in market 2 (see Fig. 9-26).
(d ) From Fig. 9-26, we see that the monopolist should charge a price of $9 per unit in market 1 and $11 per
unit in market 2. At these points, e 1 ¼ 3 and e 2 ¼ 11/5. From MR 1 ¼ P 1 ,(l2 1/e), we get $6 ¼ P 1 (l 2 1/3);
thus P 1 ¼ $9. From MR 2 ¼ P 2 (1 2 l/e 2 ), we get $6 ¼ P 2 [l 2 1/(11/5)]; thus P 2 ¼ $11. Note that the monopolist
should charge a higher price in the market with the more inelastic D curve. This is always the case.
(e)
The LAC to produce 11 units of output is $8. Thus, the monopolist makes a profit of $1 per unit and $6 in total
in market 1 and a profit of $3 per unit and $15 in total in market 2. The total profit of $21 represents the
maximum total profit this monopolist can make per unit of lime in the long run.
Fig. 9-26
9.27 Give two real-world examples of third-degree price discrimination.
Third-degree price discrimination is fairly common in the real world. For example, electric power companies
charge a lower rate to industrial users of electricity than to households because the former have a more elastic D
curve for electricity since there are more substitutes, such as generating their own electricity, available to them.
The markets are kept separate by different meters. If the two markets were not separate, industrial users of electricity
would buy more electricity than they need and would undersell the monopolist in supplying electricity to households
and other private users until the price of electricity in the two markets were completely equalized. Note
also that if the D curves in the two markets have the same price elasticity, the monopolist would maximize total
profits by selling the commodity at the same price in the two markets.
A second example of third-degree price discrimination occurs in international trade when a nation sells a commodity
abroad at a lower price than in its home market. This is referred to as “dumping.” The reason for dumping is
that the D curve for the monopolist’s product is more elastic abroad (because substitutes are available from other
nations) than in the domestic market (where imports from other nations are kept out and the market kept separate by
import restrictions).