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 -5. Your marginal cost of producing the product is $60. a. Determine your optimal markups and prices under third-degree price discrimination.

Answer 1

Answer:

group 1 Markup  = 0.333

group 2 Markup  = 0.25

group 1 price = $79.98

group 2 price = $75

Explanation:

given data

Group 1 elasticity of demand = -4

Group 2 elasticity of demand = -5

marginal cost =  $60

to find out

optimal markups and prices under third degree price discrimination

solution

we get here Under Markup pricing  that is for group 1 and 2 is

Markup is = $\frac{1}{- elasticity - 1}$    .....................1

so for group 1 Markup =  $\frac{1}{- (-4) - 1}$

group 1 Markup  = 0.333

and

for group 2 Markup =  $\frac{1}{- (-5) - 1}$

group 2 Markup  = 0.25

and

price will be

price = ( 1 + markup) ×  Marginal cost     ...................2

group 1 price = ( 1 + 0.333 ) x 60

group 1 price = $79.98

and

group 2 price = ( 1 + 0.25 ) x 60

group 2 price = $75