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 -6, while group 2’s is -3. Your marginal cost of producing the product is $70.
a. Determine your optimal mark-ups and prices under third-degree price discrimination.
Instruction: Round your answers to two decimal places.
Mark up for group 1:
Price for group 1: $
Mark up 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. Select the correct answers in order to receive full credit.
1. At least one group has elasticity of demand greater than 1 in absolute value.
2. We are able to prevent resale between the groups.
3. There are two different groups with different (and identifiable) elasticities of demand.
4. At least one group has elasticity of demand less than one in absolute value.