ARE THE CONDITIONS NECESSARY FOR PRICE DISCRIMINATION TO BE AN EFFECTIVE MEANS OF ENHANCING PROFITS BEING MET?

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ARE THE CONDITIONS NECESSARY FOR PRICE DISCRIMINATION TO BE AN EFFECTIVE MEANS OF ENHANCING PROFITS BEING MET?

Question
You are the only pharmacist in a small town; the next closest drugstore is 50

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miles away. The population in your town consists of young farmers and older retired

families. You have noticed that the young farmers are less sensitive to price changes

than the retired population. Specifically, you have found that the working population

has an own price elasticity of demand of -1.5 and the retired farmers have an own

price elasticity of -3. Suppose that the marginal cost of supplying the two markets is

the same and equal to a constant, MC.

a. (2 pts) Are the conditions necessary for price discrimination to be an effective
means of enhancing profits being met? Explain.
b. (4 pts) What is the profit-maximizing price to charge the working farmers?
c. (4 pts) What is the profit-maximizing price to charge retired farmers?

You are the only pharmacist in a small town

Explanation & Answer

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