2) Coach Industries is a market leader in the RV industry and sells RVs in both

Question

2)      Coach Industries is a market leader in the RV industry and sells RVs in both Europe and the United States. Demand from Europe can be represented by PE=12,000-5QE and demand from North America can be represented by PN=60,000-30QN. The firm estimates marginal costs to be constant at $8,000 per RV.

a)      Should Coach charge the same price in each market? What price(s) should it charge? How much should it plan to sell in each market at these prices?

b)      Calculate the own-price elasticities in each of these markets at the optimal quantities chosen in part a). Are these prices consistent with what you know about 3rd degree price discrimination? Why or why not?

Explanation / Answer

Given,

MC = 8000

PE=12,000-5QE and PN=60,000-30QN

a) Equilibrium in europe is attained at a point where P = MC. Thus,

12000 - 5Qe = 8000 which gives Qe = 800 and Pe = 8000.

Equilibrium in North America is given as: 60000-30Qn = 8000 which gives QN = 1733 and PN = 8000.

b) Own price elasticity in Europe =

dQ/dP. P/Q = 5. (8000)/(800) = - 50

and own price elasticity in North America = (30). 8000/1733 = 138.50

Clearly, the prices in the two markets are not consistent with third degree price discrimination which says that higher prices should eb charged from the market where demand is less elastic and lower prices from the market which is more elastic.

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