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

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

a. price for group 1 = (E1/ (1 + E1))(MC) = (-5 / (1 -5))($40) = (1.25)($40) = $50.00 mark up for group 1 = price for group 1 / MC = 50/40 = 1.25 price for group 2 = (E2/ (1 + E2))(MC) = (-3 / (1 -3))($40) = (1.50)($40) = $60.00 mark up for group 2 = price for group 2 / MC = 60/40 = 1.50

ID: 1194235 • Letter: Y

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 -5, while group 2’s is -3. Your marginal cost of producing the product is $40.

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

Instruction: Round your answers to two decimal places.

Markup for group 1: ____ (-0.25 is incorrect)
Price for group 1: $ _____

Markup for group 2: _____ (-0.5 is incorrect)
Price for group 2: $ _____

Explanation / Answer

price for group 1 = (E1/ (1 + E1))(MC) = (-5 / (1 -5))($40) = (1.25)($40) = $50.00

mark up for group 1 = price for group 1 / MC = 50/40 = 1.25

price for group 2 = (E2/ (1 + E2))(MC) = (-3 / (1 -3))($40) = (1.50)($40) = $60.00

mark up for group 2 = price for group 2 / MC = 60/40 = 1.50

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

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

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