Suppose that a monopolist can segregate his buyers into two different groups to which he can charge
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Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. To maximize profit, the monopolist should charge a higher price to the group that has: LO12.6 a. the higher elasticity of demand. b. the lower elasticity of demand. c. richer members. |
Here is the full solution including the answer and explanation.
Explanation
b is correct
A lower elasticity of demand implies that there would be less change in quantity demanded for a price increase. Consequently, it would be more profitable to charge a higher price from consumers having inelastic demand.
a is incorrect
Consumers having higher elasticity of demand would choose not to consume in case of higher prices or look for other alternatives in the market. Consequently, charging a higher price from these consumers would reduce the total revenue.
c is incorrect
Richer people may have elastic or inelastic demand depending upon their preferences. In case they have elastic demand for a commodity, charging a higher price would reduce the demand as richer persons starts substituting the good. In case they have inelastic demand, monopolists' revenue would increase.
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