Correct Option: D. Elastic in one market and inelastic in the other Explanation of the Correct Answer Price discrimination is a pricing strategy used by monopolists (or firms with market power) to maximize profits by charging different prices to different consumers for the same product. The key to successful price discrimination lies in understanding the elasticity of demand in different markets. Elasticity of Demand refers to how sensitive the quantity demanded of a good is to a change in its price.

1. Elastic Demand: When demand is elastic (elasticity > 1), consumers are very responsive to price changes. A small increase in price will lead to a large decrease in quantity demanded.
2. Inelastic Demand: When demand is inelastic (elasticity < 1), consumers are less responsive to price changes. A price increase will lead to a smaller decrease in quantity demanded.
3. Unitary Elastic Demand: When demand is unitary elastic (elasticity = 1), the percentage change in quantity demanded is equal to the percentage change in price.

Why Option D is Correct

• Different Elasticities in Different Markets: A monopolist can effectively practice price discrimination when they can identify two distinct markets with different elasticities of demand. For example, if one market has elastic demand and another has inelastic demand, the monopolist can charge a higher price in the inelastic market (where consumers are less sensitive to price changes) and a lower price in the elastic market (where consumers are more sensitive).
• Maximizing Profits: By charging higher prices in the inelastic market, the monopolist can capture more consumer surplus (the difference between what consumers are willing to pay and what they actually pay) and increase overall profits. Conversely, by lowering prices in the elastic market, the monopolist can increase sales volume, which can also contribute to higher total revenue.

Why the Other Options are Incorrect

• Option A: Elastic in both markets: If demand is elastic in both markets, the monopolist cannot effectively price discriminate. Any increase in price would lead to a significant drop in quantity demanded in both markets, making it unprofitable to charge different prices.
• Option B: Unitary elastic in both markets: If demand is unitary elastic in both markets, the monopolist would not gain any additional revenue from changing prices. The total revenue remains constant with price changes, so there is no incentive to price discriminate.
• Option C: Inelastic in both markets: If demand is inelastic in both markets, the monopolist could charge a higher price in both markets, but this does not constitute effective price discrimination. The monopolist would not be maximizing profits by differentiating prices based on varying elasticities, as both markets would respond similarly to price changes.

Summary of Key Points

• Price Discrimination: A strategy used by monopolists to charge different prices based on consumer sensitivity to price changes.
• Elastic vs. Inelastic Demand: Understanding the elasticity of demand is crucial for effective price discrimination.
• Maximizing Profits: A monopolist can maximize profits by charging higher prices in inelastic markets and lower prices in elastic markets.
• Correct Answer: The correct option is D, as it allows for effective price discrimination based on differing elasticities in two markets.

This understanding of price discrimination and elasticity is essential for analyzing monopolistic behavior in economics.