Suppose a manager is interested in implementing third-degree price discrimination.The manager knows that the price elasticity of demand for Group 1 is −2 and the price elasticity of demand for Group 2 is −1.2.Based on this information alone we can conclude that the price charged to Group 2 will be:
A) the same as the price charged to Group 1.
B) lower than the price charged to Group 1.
C) higher than the price charged to Group 1.
D) There is insufficient information to determine whether Group 2 will have a higher, lower, or the same price as Group 1.

Question

Quizplus · Accepted Answer

The price charged to Group 2 will be higher than the price charged to Group 1 because the price elasticity of demand for Group 2 is less elastic (-1.2) than for Group 1 (-2), indicating that Group 2 is less price sensitive and can sustain a higher price. From a profit-maximizing standpoint, the manager would charge a higher price to Group 2 compared to Group 1.

Suppose a Manager Is Interested in Implementing Third-Degree Price Discrimination