You are the manager of a monopoly that sells a product to two groups of consumer
ID: 1090764 • Letter: Y
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 -4, while group 2's is -3. Your marginal cost of producing the product is $20.
a. Determine your optimal markups and prices under third-degree price discrimination.
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: You may select more than one answer.
Explanation / Answer
Mc = Pn* [(1+En) / En)
Pn = Mc*[En / (1+En)
Group 1 Price = 20 [ -4 / (1-4)] = $26.67
Group 1 Markup = 26.67/20 - 1= 0.333 = 33.33% or $6.67
Group 2 Price = 20 [ -3 / (1-3)] = $30
Group 2 Markup = 30/20 -1 = 0.5 = 50% or $10
for part b)
We are able to prevent resale between the groups.
There are two different groups with different (and identifiable) elasticities of demand.