Question

Question 2

You are the manager of a fast food shop in a small town, and your goal is to maximise profits. Based on your experience, the elasticity of demand of students for a hamburger is -2, while that of adults is -1.5. Your marginal cost is $4.   

(a) Name any TWO of the essential elements for implementing price discrimination. Can the manager implement price discrimination? Explain.

(b)    What is the profit-maximising price to charge a student for a hamburger?

Answer 1

(a)

Two conditions for price discrimination are:

1. The seller can effectively segregate customers into different segments, on basis of their price elasticity of demand, and

2. Re-sale across different segments is not possible.

While the Manager can classify students and adults on basis of institutional ID of students, he cannot prevent a resale where students will buy at lower price and sell to adults at a price higher than their own purchase price, but lower than the restaurant's price charged to adults. So price discrimination will be ineffective.

(b)

Lerner Index = - 1 / E = (P - MC) / P

- 1 / - 2 = (P - 4) / P

1/2 = (P - 4)/P

P = 2P - 8

P = $8