Draw three sets of price-quantity axes side by side. On the first set of axes (graph), draw a straight-line demand curve (D1) that is steep, starts at a high price, and refers to the domestic market. On the same set of axes, draw the corresponding marginal revenue curve (MR1). On the second graph, draw a straight-line demand curve (D2) that is low and flat and refers to the international market. On the same (second) set of axes, draw the corresponding MR2 curve. On the third graph, sum horizontally the MR1 and MR2 curves (∑MR) and draw a marginal cost curve (MC) that intersects the ∑MR curve from below in the third graph; then draw a horizontal dashed line and extend it to the second and first graphs. The point where the horizontal dashed line crosses the MR1 curve indicates how much the domestic monopolist should sell in the domestic market, and where the horizontal line crosses the MR2 curve indicates how much he should sell on the international market.
(a) What price should the monopolist charge in the domestic market (P1) and in the foreign market (P2)?
(b) Why does this represent the best, or optimal, distribution of sales between the two markets?