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

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.

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