Question

In: Economics

You are the manager of a monopoly that sells a product to two groups of consumers...

You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1’s elasticity of demand is -5, while group 2’s is -2. Your marginal cost of producing the product is $30.

a. Determine your optimal markups and prices under third-degree price discrimination.  

Instructions: Enter your responses rounded to two decimal places.

Markup for group 1: _______________

Price for group 1: $ ________________

Markup for group 2: ________________________

Price for group 2: $ ___________________


b. Which of the following are necessary conditions for third-degree price discrimination to enhance profits.

Instructions: In order to receive full credit, you must make a selection for each option. For correct answer(s), click the box once to place a check mark. For incorrect answer(s), click twice to empty the box.

  • There are two different groups with different (and identifiable) elasticities of demand.unanswered
  • At least one group has elasticity of demand greater than 1 in absolute value.unanswered
  • We are able to prevent resale between the groups.unanswered
  • At least one group has elasticity of demand less than one in absolute value.unanswered

Solutions

Expert Solution

SOLUTION ;-  

GIVEN THAT  

Group 1’s elasticity of demand is -5

, while group 2’s is -2.

Your marginal cost of producing the product is $30.

a.

The formula for mark up is

Mark Up = E / (1 + E)

Here, E = elasticity of demand

Group 1’s elasticity of demand is -5

So, Mark up for group 1 = - 5 / (1 - 5)

Mark up for group 1 = - 5 / - 4

Mark up for group 1 = 1.25

Now , we can determine the price for group 1, by multiplying MC with the mark up value.

Price for group 1 = 1.25 * $30

Price for group 1 = $37.5.

Now, Group 2’s elasticity of demand is - 2

So, Mark up for group 2 = - 2 / (1 - 2)

Mark up for group 2 = - 2 / - 1

Mark up for group 2 = 2

Price for group 2 = 2 * $30

Price for group 2 = $60.

So,

Markup for group 1: 1.25
Price for group 1: $37.50

Markup for group 2: 2
Price for group 2: $60

b.

The necessary conditions for third-degree price discrimination to enhance profits is

There are two different groups with different (and identifiable) elasticities of demand.

We are able to prevent resale between the groups.

Rahul Sunny answered 1 year ago
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