Assume that a profit-maximizing firm practices price discrimination in two diffe

Question

Assume that a profit-maximizing firm practices price discrimination in two different market segments. If the marginal cost of producing the good is the same, the price:

A) will be lower in the segment with lower cross price elasticity of demand.

B) will be higher in the segment with higher income elasticity of demand.

C) will be lower in the segment with lower fixed costs.

D) will be higher in the segment with more inelastic demand.

E) will be higher in the segment with higher marginal revenue.

A) will be lower in the segment with lower cross price elasticity of demand.

B) will be higher in the segment with higher income elasticity of demand.

C) will be lower in the segment with lower fixed costs.

D) will be higher in the segment with more inelastic demand.

E) will be higher in the segment with higher marginal revenue.

Explanation / Answer

Answer
D) will be higher in the segment with more inelastic demand.

example
e=1.5
P=MC/(1-(1/e))
=50/(1-(1/1.5))
=150

e=2
P=50/(1-(1/2))=100
the price is lower when the elasticity is higher

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