Firm C&D is a monopolist both in the US market and in the international market. The demand curve for the US market is QUS = 10 − PUS and the demand curve for the international market is QI =20−PI. The firm’s cost function is C(Q)=2Q+2.
(a) Suppose the firm is restricted to set a single price for both markets (i.e., no price discrimination). What price does the firm set? How much profit does the firm collect?
(b) Suppose the firm is able to set a different price for each market (i.e., third-degree price discrimi- nation). What prices does the firm set? How much profit does the firm collect?
(c) What is the price elasticity of demand in each market at the prices you identified in (b)?
(d) Compare the prices in each market with price discrimination taking into consideration the differences between the price elasticity of demand in each market at these prices. Do you think there is a relation between the price and the price elasticity of demand in each market? Why?
(e) Discuss the overall effects of price discrimination (relative no discrimination) on profit, consumer surplus, and total welfare.