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You are the manager of a monopoly that sells a product to two groups of consumers in different...

Question:

You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1s elasticity of demand is -4, while group 2s is -4. Your marginal cost of producing the product is $30.

a. Determine your optimal markups and prices under third-degree price discrimination. Instruction: Round your answers to two decimal places.

Markup for group 1: _

Price for group 1: $ _

Markup for group 2: _

Price for group 2: $ _

Which of the following are necessary conditions for third-degree price discrimination to enhance profits. Instructions: You may select more than one answer.

A. At least one group has elasticity of demand less than one in absolute value.

B. At least one group has elasticity of demand greater than 1 in absolute value.

C. We are able to prevent resale between the groups.

D. There are two different groups with different (and identifiable) elasticities of demand.

Price ceiling:

A price ceiling, is set below the market price so that the quantity demanded is more than the quantity supplied for a product. Price ceilings typically show shortages in an economy. They need to be monitored closely.

Answer and Explanation:

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a. Based on: {eq}Lerner\,Index = \frac{{ - 1}}{{Ed}} = \frac{{\left( {P - MC} \right)}}{P} {/eq}

Group 1: {eq}\begin{array}{c} Mark\,up = \frac{{ -...

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The Elasticity of Demand: Definition, Formula & Examples

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Chapter 3 / Lesson 7
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Understand what elasticity of demand is and discover different types of elasticity of demand. Learn how it is measured and review the elasticity of demand formula.


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