A firm uses third-degree price discrimination to sell the same cologne under two

Question

A firm uses third-degree price discrimination to sell the same cologne under two different labels. The price elasticity of demand for `High Class' is -2. The price elasticity of demand for `Splash-This-Stuff-On' is -5. Which one of the following statements is true? Answer The price of `High Class' will be 2/5 times the price of `Splash-This-Stuff-On. The price of `High Class' will be 5/2 times the price of `Splash-This-Stuff-On The price of `High Class' will be 1/7 times the price of `Splash-This-Stuff-On. The price of `High Class' will be 8/5 times the price of `Splash-This-Stuff-On.' A firm uses third-degree price discrimination to sell the same cologne under two different labels. The price elasticity of demand for `High Class' is -2. The price elasticity of demand for `Splash-This-Stuff-On' is -5. Which one of the following statements is true? The price of `High Class' will be 2/5 times the price of `Splash-This-Stuff-On. The price of `High Class' will be 5/2 times the price of `Splash-This-Stuff-On The price of `High Class' will be 1/7 times the price of `Splash-This-Stuff-On. The price of `High Class' will be 8/5 times the price of `Splash-This-Stuff-On.' The price of `High Class' will be 2/5 times the price of `Splash-This-Stuff-On. The price of `High Class' will be 5/2 times the price of `Splash-This-Stuff-On The price of `High Class' will be 1/7 times the price of `Splash-This-Stuff-On. The price of `High Class' will be 8/5 times the price of `Splash-This-Stuff-On.'

Explanation / Answer

d)The price of `High Class' will be 8/5 times the price of `Splash-This-Stuff-On.'

P1/P2= (1 + 1/e2) / (1 + 1/e1). Letting good 1 be "High Class," P1/P2= (1+ 1/(-5)) / (1 + 1/(-2)) = .8/.5 = 8/5

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