A monopolist practices third degree price discrimination in two markets

Economics Dec 12, 2020

A monopolist practices third degree price discrimination in two markets. The ratio of price to marginal cost in market 1 is 3. The price of the good in market 1 is equal to 100. The price of the good in market 2 is equal to 80. Determine the elasticity of demand with respect to price in the second market.

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Expert Solution

ans. -1.72

MR1 = P1 (1+1/E1)
so (1+1/E1) = 1/3
E1 = -3/2

This means that MR 1= 100 x (1+1/E1) = 33.33

In equilbrium, MR1 = MR2

MR2 = P2 (1+1/E2)
so 33.33 = P x (1+1/E2)
1+1/E2 = 33.33/80
1/E2 = 33.33/80 - 1 = -0.58
E2 = -1.72

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