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Optimal markups and prices

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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.

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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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Optimal Markup: Optimal Markup. Jerry Jones is a managing partner of Camden & Associates, Inc., a New York based management-consulting firm. Jones has asked you to complete an analysis of profit margins for Norton Inc., a client firm. Unfortunately, your predecessor on this project was abruptly transferred, leaving only sketchy information on the client's pricing practices.

Optimal Markup. Jerry Jones is a managing partner of Camden & Associates, Inc., a New York based management-consulting firm. Jones has asked you to complete an analysis of profit margins for Norton Inc., a client firm. Unfortunately, your predecessor on this project was abruptly transferred, leaving only sketchy information on the client's pricing practices.

A) Use the available data to complete the following table:

Price Marginal Markup on Markup on
Cost Cost Price

$1 $0.50 100% 50%
2 1.60 - -
5 - 400 -
10 - - 25
- 15.00 66.7 -

B) Calculate the optimal markup cost and optimal markup price for each product, based on the following estimates of the point price elasticity of demand:

Product Price Optimal Markup Optimal Markup
Elasticity of on Cost, MOC* on Price, MOP*
Demand

A -1.5
B -2.0
C -2.5
D -5.0
E -10.0

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