ECN 712 Fall 2009 Professor Schlee Problem Set X, Due 17 November 1. Price discrimination (of the third degree) . A monopolist produces a single good under constant returns to scale. It sells the good in two markets, 1 and 2, and the demands are independent (for i 6 = j , the price it charges in market i does not aﬀect the demand in market j , implying that it can charge diﬀerent prices in the markets). (a) Let ε i ( p i ) denote the price elasticity of demand in market i as a function of the price in market i . Show that, at any interior solution p 1 > p 2 if and only if ε 1 ( p 1 ) > ε 2 ( p 2 ): at any solution the market with the higher price has a more inelastic demand. (b) Suppose now that the inverse demand in each market is a straight-line (as long as price is positive). The demand in market 1 is more price elastic than the demand for market 2 when the demand curves are evaluated at the same quantity . Evaluate : “The ﬁrm will charge a higher price in market 2.” How do you reconcile your answer with part (a)?
This is the end of the preview. Sign up
access the rest of the document.
This note was uploaded on 11/19/2010 for the course ECON 202 taught by Professor Schlee during the Spring '10 term at ASU.