Across Country Ski Tours has determined that the price elasticity of demand for customers who do not own their own equipment is -2, while the price elasticity of demand of those who do own their own equipment is -5. Assume that the marginal cost is constant at $10. If the firm can practice third-degree price discrimination, it should charge a price of $____ to customers who own their equipment.

Question

Quizplus · Accepted Answer

For customers who own their equipment, the price elasticity of demand is -5. Using the formula for optimal price under monopoly or price discrimination, P = MC / (1 + (1/E)), where P is the optimal price, MC is the marginal cost, and E is the price elasticity of demand. Substituting the given values, P = 10 / (1 + (1/-5)) = 10 / (1 - 1/5) = 10 / (4/5) = 12.50.

Across Country Ski Tours Has Determined That the Price Elasticity