Consider a Monopolist That Is Able to Distinguish Between Two

question 109

Multiple Choice

Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $18 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $25 and marginal revenue in segment B is $15. Is this firm maximizing its profit?

• A) Yes, because since marginal cost is constant, the firm must set a single price.
• B) No, because it is only possible to equate MR and MC when there is a single MR curve.
• C) Yes, because it has set a price such that MC is between the MRs of the two market segments.
• D) No, this firm can increase its profits by price discriminating across the two market segments.

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Definitions:

Straight-Line Depreciation

A method of calculating the depreciation of an asset, where the asset's cost is evenly spread over its useful life.

Yearly Depreciation

The accounting process of allocating the cost of a tangible asset over its useful life, reflecting the asset's consumption, wear, and tear over time.

Discount Rate

The interest rate used to discount future cash flows of a financial instrument back to their present value, thus helping to determine the potential value of an investment.

Straight-Line Depreciation

A method of allocating an asset's cost evenly throughout its useful life.