Calculate the profit-maximizing quantities and prices for a firm that can practice third-degree price discrimination. Use the result to prove the general relationship between pricing policy and price elasticity of demand.
A. Explain what is meant by "third-degree" price discrimination. What conditions would have to hold for a firm to be able to engage in third-degree price discrimination? If these conditions hold, what general rule would a firm follow to maximize profits? How would its pricing policy be related to the elasticity of demand?