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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 2 groups. (6pts)

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Answer #1

A) the monopolist has find out the price elasticity of demand for the two groups but not much information about the willingness to pay. therefore two different prices can be charged under third degree price discrimination from two different consumer groups based on their elasticity of demand

B) elasticity of demand for group one is greater than the elasticity of demand for group to which means that group 1 has relatively elastic demand. therefore a lower price should be charged from group 1 and a higher price should be charged from group 2

C) use the following rule

P = MC * ed / (ed+1)

Price for group 1 = 70*-3.5/-2.5 = $98

Price for group 2 = 70*-2.9/-1.9 = $106.84

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