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 non senior citizens and resultant marginal cost under third-degree price discrimination are

Question

Quizplus · Accepted Answer

We know that under third-degree price discrimination, the monopolist firm charges different prices for different groups of customers based on their elasticity of demand. The optimal prices charged to each group of customers should be such that the marginal revenue earned from both groups is equal to their respective marginal costs.

Let's first calculate the optimal price for non-senior citizens:

Price elasticity of demand = -1.25
Therefore, we know that if the price is increased by 1%, the quantity demanded will decrease by 1.25%.

We also know that the marginal cost of producing a coffee is $0.02.

To find the optimal price for non-senior citizens, we need to find the price that maximizes the firm's profits. This occurs where MR = MC.

Let P1 be the price charged to non-senior citizens.
We know that MR1 = P1*(1-1.25P1) = $0.02

Solving for P1, we get P1 = $0.10

Therefore, the optimal price for non-senior citizens is $0.10.

Now, let's find the price for senior citizens:

Price elasticity of demand = -5
Therefore, we know that if the price is increased by 1%, the quantity demanded will decrease by 5%.

We also know that the marginal cost of producing a coffee is $0.02.

Let P2 be the price charged to senior citizens.
We know that MR2 = P2*(1-5P2) = $0.02

Solving for P2, we get P2 = $0.02

Therefore, the optimal price for senior citizens is $0.02.

So, the best choice is C) $0.10 and $0.02.

The Price Elasticity of Demand for Senior Citizens Purchasing Coffee