Question

Suppose a firm sells to senior citizens and others at a single price of $3. A It estimates that at the $2 price, seniors have an elasticity of -3 while others have an elasticity of -1.5. The marginal cost of the product is constant at $1. How could this firm change its pricing strategy to maximize profits using only linear (per unit) prices?  

Answer 1

We are given that seniors have an elasticity of -3 while others have an elasticity of -1.5. The marginal cost of the product is constant at $1. The profit maximizing rule asserts that P = MC x (e/e + 1)

Hence we have a price for seniors = 1 x (-3/-2) = $1.50 per unit and price for others = 1 x (-1.5/-0.5) = $3 per unit.  

Firm can change its pricing strategy to maximize profits by charging a price of $1.50 per unit from seniors and $3 per unit from others.