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 -3, while group 2’s is -2. Your marginal cost of producing the product is $70. 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.

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

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

We are able to prevent resale between the groups.

Answer 1

We know that in equilibrium MR= MC

Also, the relationship between MR, price and elasticity of demand (e) is MR = P (1 + 1/e)

For group 1- MR= P( 1-1/3) =2P/3

For group 2- MR= P(1-1/2) = 1/2 P

Now since at eq. MR = MC

P for group 1 ----- P = (70 *3) /2 =105 Markup for group 1= 105-70 = 35

P for group 2------P = (70*2) = 140 Markup for group 2 = 140 - 70 = 70

2. Necessary conditions for third-degree price discrimination to enhance profits-

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

We are able to prevent resale between the groups.

At least one group has the elasticity of demand greater than 1 in absolute value. ( this is because if lesser than 1 then the firm would face losses as P would be lesser than MC)