The price elasticity of demand for senior citizens purchasing coffee from McDonald's is -5 while non senior citizens have a price elasticity of demand equal to -1.25.If is cost McDonald's $0.02 to produce a coffee, the optimal price for a cup of coffee for senior citizens and resultant marginal cost under third-degree price discrimination are, respectively,

Question

Quizplus · Accepted Answer

Under third-degree price discrimination, the firm charges different prices to different groups of consumers based on their price elasticity of demand. The marginal revenue for each group is equal to its price elasticity times the market price.

Let P1 be the price charged to senior citizens and P2 be the price charged to non-senior citizens. Then, we have:

- MR1 = -5P1
- MR2 = -1.25P2

Since the marginal cost is the same for both groups, the profit-maximizing prices are found by equating the marginal revenue to the marginal cost. That is:

- MR1 = MC = 0.02
- MR2 = MC = 0.02

Solving the above equations, we get:

- P1 = 0.025
- P2 = 0.08

The optimal price for senior citizens is $0.025, and the resultant marginal cost is $0.02. Therefore, the correct answer is C).

The Price Elasticity of Demand for Senior Citizens Purchasing Coffee