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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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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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 + ...
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