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 -2, while group 2’s is -6. Your marginal cost of producing the product is $10. 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.

At least one group has elasticity of demand greater than 1 in absolute value.

There are two different groups with different (and identifiable) elasticities of demand.

At least one group has elasticity of demand less than one in absolute value.

We are able to prevent resale between the groups.

Explanation / Answer

A. Mc=p(1+1/ed)

Group 1:

10=p(1-1/2)

P=20.

Mark up=20-10=$10.

Group2:

10=p(1-1/6)

P=12.

Mark up= 12-10 =$2.

B. To enhance profits, atleast one of the group should have an elasticity greater than one. Hence point (i) is a necessary condition and option (iv) also as we are able to preveenet resale between the groups.

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