A monopolist operates in two distinct markets, Market A and Market
B. The firm has determined that consumers in Market A have a very high price elasticity of demand (they are very sensitive to price changes), while consumers in Market B have a very low price elasticity of demand. To maximize total profit through third-degree price discrimination, how should the firm set its prices?

The Core Logic The goal of third-degree price discrimination is to capture as much consumer surplus as possible from different groups. The rule for profit maximization is to set Marginal Revenue (MR) equal to Marginal Cost (MC) for each group: MR_A = MR_B = MC   The Role of Elasticity The relationship between price (P), marginal revenue (MR), and price elasticity of demand (E_d) is given by the formula: MR = P \left( 1 + \frac{1}{E_d} \right) (Note: E_d is typically a negative number. The more elastic the demand, the larger the absolute value of E_d.)

• In Market A (High Elasticity): Because these consumers are price-sensitive, a high price would cause a large drop in quantity demanded. To maximize profit here, the firm must keep the price relatively lower .
• In Market B (Low Elasticity): These consumers are "inelastic"—they need or want the product regardless of price (e.g., business travelers or people with no substitutes). The firm can "exploit" this by charging a higher price without losing many customers.

  Real-World Examples

• Student/Senior Discounts: Students usually have lower incomes and more flexible schedules (high elasticity), so they get lower prices. Working adults are less sensitive to the price of a movie ticket (lower elasticity) and pay the full price.
• International Pricing: A textbook might be sold for 150 in the US but only 40 in a developing country because the price sensitivity in the latter is much higher.

  Why other options are incorrect:

• A is backwards: Charging a high price to price-sensitive customers would lead to a massive loss in sales volume, reducing profit.
• B describes uniform pricing: This is what a firm does when it cannot price discriminate. It is rarely the profit-maximizing choice if the markets are truly separable.
• D is inefficient: Even if Market A pays less, as long as the price charged is above the Marginal Cost (P > MC), the firm still makes a profit on every unit sold there. Ignoring a whole market means leaving money on the table.