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 do not own their equipment.
A) 20
B) 17.50
C) 15
D) 12.50

Question

Quizplus · Accepted Answer

For customers who do not own their equipment, with a price elasticity of demand of -2, the optimal price can be calculated using the formula P = MC / (1 + (1/Ed)), where P is the price, MC is the marginal cost, and Ed is the price elasticity of demand. Plugging in the values, P = $10 / (1 + (1/-2)) = $10 / (1 - 0.5) = $10 / 0.5 = $20.

Across Country Ski Tours Has Determined That the Price Elasticity