Question

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

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.  

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.


  • There are two different groups with different (and identifiable) elasticities of demand.unchecked
  • At least one group has elasticity of demand less than one in absolute value.unchecked
  • We are able to prevent resale between the groups.unchecked
  • At least one group has elasticity of demand greater than 1 in absolute value.

Homework Answers

Answer #1

(a)

Group 1

Ed = -5

MC = 20

Calculate Price (P) -

[P - MC]/P = -(1/Ed)

[P - 20]/P = -[1/(-5)]

[P - 20]/P = 1/5

5(P - 20) = P

5P - 100 = P

5P - P = 100

4P = 100

P = 100/4 = 25

Markup = Price - Marginal cost = 25 - 20 = 5

Thus,

Markup for Group 1 = $5

Price for Group 1 = $25

Group 2

Ed = -6

MC = 20

Calculate Price (P) -

[P - MC]/P = -(1/Ed)

[P - 20]/P = -[1/(-6)]

[P - 20]/P = 1/6

6(P - 20) = P

6P - 120 = P

6P - P = 120

5P = 120

P = 120/5 = 24

Markup = Price - Marginal cost = 24 - 20 = 4

Thus,

Markup for Group 2 = $4

Price for Group 2 = $24

(b)

The necessary conditions for the third degree price discrimination are as follows -

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

2. We are able to prevent resale between the groups.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are the manager of a monopoly that sells a product to two groups of consumers...
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:...
You are the manager of a monopoly that sells a product to two groups of consumers...
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 -4. Your marginal cost of producing the product is $30. 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:
A monopoly that sells coconuts to two groups of consumers in different parts of an island....
A monopoly that sells coconuts to two groups of consumers in different parts of an island. Group 1’s elasticity of demand is 3.5, while group 2’s is -2.9. Your marginal cost of producing the product is $70. © a. What is the best type of price discrimination this firm can engage in? Why? b. Without calculation, the price charged to which group would be the higher price? Why? c. Calculate the prices that should be charged to the 2 groups.
A monopoly that sells coconuts to two groups of consumers in different parts of an island....
A monopoly that sells coconuts to two groups of consumers in different parts of an island. Group 1’s elasticity of demand is 3.5, while group 2’s is -2.9. Your marginal cost of producing the product is $70. © a. What is the best type of price discrimination this firm can engage in? Why? (3.5pts) b. Without calculation, the price charged to which group would be the higher price? Why? (3.5pts) c. Calculate the prices that should be charged to the...
A monopolist practices third degree price discrimination by separating its customers into two groups: consumers under...
A monopolist practices third degree price discrimination by separating its customers into two groups: consumers under 65 and senior citizens. Themonopolist’s marginal cost is MC = 0.05q, where q is the total output in both markets. The marginal cost does not depend on the market in which the goods are sold.The demand curves are !    Adults: PA = 25 – 1/6 × QA = 25 – 0.1667 × QA !    Seniors:        PS = 15 – c × QS = 15 – 0.125 ×...
Suppose that a monopolist producing bicycles can divide the aggregate demand into two groups: The domestic...
Suppose that a monopolist producing bicycles can divide the aggregate demand into two groups: The domestic market and the foreign market. The demand curve for the monopolist’s product in the domestic market is y1=1200-10p1 and the demand curve for the monopolist’s product in the foreign market is y2=800-10p2. The monopolist’s total cost function is given by C(y)= 50y where y=y1+y2. a) Assume that the monopolist does not practice price discrimination. Calculate his/her profit-maximizing price-quantity combination and the maximum profit. b)...
12. [15 pts] A company has monopoly rights to sell the popular video “Boyfights”. Suppose there...
12. [15 pts] A company has monopoly rights to sell the popular video “Boyfights”. Suppose there are two groups of buyers of Boyfights. Demand for the respective groups is given by the following equations: Group I: P1 = 10 – Q1 Group II: P2 = 8 – 2Q2 Where Q1 and Q2 are the number of Boyfights movies sold to each group. The total cost function for making each copy of the movie is TC = Q, where Q =...
A supermarket is a local monopoly that sells many grocery products, using markup pricing. That is,...
A supermarket is a local monopoly that sells many grocery products, using markup pricing. That is, its price for a product is P = c(1 + m), where c is how much it pays for each unit of the product from producers, and m is the markup it adds to the product when selling to consumers. Products may differ in the price elasticity of demand If the price elasticity for a good is –6, what will be the supermarket’s optimal...
Space Spider Airline is the only airline in Spiderland. The airline has two major groups of...
Space Spider Airline is the only airline in Spiderland. The airline has two major groups of passengers – business travelers and vacation travelers. One group of them has its price elasticity of demand at -1.8 and another group has -3.0 respectively. a. Which group, business travelers or vacation travelers, is more likely having its price elasticity of demand at -3.0? Briefly explain your answer. b. Which traveler group will be charged a higher fare by Space Spider Airline under price...
Space Spider Airline is the only airline in Spiderland. The airline has two major groups of...
Space Spider Airline is the only airline in Spiderland. The airline has two major groups of passengers – business travelers and vacation travelers. One group of them has its price elasticity of demand at -1.8 and another group has -3.0 respectively. a. Which group, business travelers or vacation travelers, is more likely having its price elasticity of demand at -3.0? Briefly explain your answer. b. Which traveler group will be charged a higher fare by Space Spider Airline under price...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT