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

Question

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 -4, while group 2’s is -6. Your marginal cost of producing the product is $50.

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.

At least one group has elasticity of demand greater than 1 in absolute value.unanswered

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

At least one group has elasticity of demand less than one in absolute value.unanswered

We are able to prevent resale between the groups.

Explanation / Answer

Group 1’s elasticity of demand is -4, while group 2’s is -6. Your marginal cost of producing the product is $50.

Price = MC x (E / E + 1)

Price to group 1 = 50 x (-4/-3) = 66.67

Price to group 2 = 50 x (-6/-5) = 60.00

Markup = Inverse of elasticity

Hence

Markup for group 1: = 1/4 = 25% or 0.25

Markup for group 2: = 1/6 = 16.67% or 0.67

For III degree price discrimination, monopolist must prevent resale and is able to segregate market in two groups.

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

We are able to prevent resale between the groups.

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