5. You own the Whitney Farm in central Iowa. You grow and sell corn as do all th

Question

5. You own the Whitney Farm in central Iowa. You grow and sell corn as do all the neighboring farmers. You and your fellow Iowa farmers grow essentially the same corn, most of which is bought by ranchers as feed for their livestock. Your experience tells you that some ranchers raise livestock that eat only corn while other ranchers raise livestock that will eat a number of different grains. In other words, different types of ranchers have different demands for corn.

Which of the following is most likely to occur, assuming you are a profit-seeker?




A. You would like to price-discriminate but you don't believe that it will be feasible in a market in which there are so many corn farmers.

B. You will charge a higher price to the ranchers who have a less price-elastic demand for corn and a lower price to those who have a more price-elastic demand for corn.

C. You will charge a lower price to the ranchers who have a less price-elastic demand for corn and a higher price to those who have a more price-elastic demand.

Explanation / Answer

The answer here is C. We will charge the group with an elastic demand a lower price which will increase the quantity demanded. This will increase the total profit. We will charge a higher price to the group with an inelastic demand. This will decrease the quantity slightly. However, the decrease in quntity will not be greater than the increase in price due to the income and substitution effect. Ultimately, this will increase total profit.

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