#19 Please provide answers rounded to 2 decimal places. You are the manager of a
ID: 1212790 • Letter: #
Question
#19 Please provide answers rounded to 2 decimal places.
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 -6. Your marginal cost of producing the product is $20. a.Determine your optimal markups and prices under third-degree price discrimination. 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. At least one group has elasticity of demand less than one in absolute value. There are two different groups with different (and identifiable) elasticities of demand. At least one group has elasticity of demand greater than 1 in absolute value. We are able to prevent resale between the groups.Explanation / Answer
1. As per the Lerner's index the markup formula is given as = (P - MC)/P = -1/E
Where P is the price, MC is the marginal cost and E is the elasticity.
a. For group 1 :
P - 20/P = -1/-5
P - 20/P = 1/5
solving, we get,
5*(P - 20) = P
5P - 100 = P
4P = 100
or P = $25.
b. Mark-up over price is 25 - 20 = $5.
c. For group 2 :
P - MC/P = -1/E
P - 20/P = -1/-6
P - 20/P = 1/6
6*(P-20) = P
6P - 120 = P
5P = 120.
or P = $24.
d. The mark-up charged over price is = 24 - 20 = $4.
2. Option B and C are correct.
Only if there are two different groups with different identifiable elasticities, the momopolist would be able to discriminate. As for discrimination, atleast 2 groups with different elasticities are required.
Moreover, if they are able to arbitrage amongst each other, the discrimination would not be possible,so preventing resale is a necessary condition.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.