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Optimal markups and prices

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.
B) Identify the conditions under which third-degree price discrimination enhances profits.

Solution Preview

A) Determine your optimal markups and prices under third-degree price discrimination.
The optimal mark up can be calculated by using the formula,

Optimal markup = -1 / (1 + e),
where 'e' is the elasticity of demand.

The optimal markup for group 1 consumers will be,

Optimal markup = -1 / (1 - 2) = -1/(-1)

= 1 or 100%

Mark up price = MC * (1 + ...

Solution Summary

The solution contains the determination optimal markups and prices under third-degree price discrimination using elasticity of demand and marginal cost.

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