Suppose a manager is interested in implementing third-degree price discrimination. The manager knows that the price elasticity of demand for Group 1 is -2 and the price elasticity of demand for Group 2 is -1.2. Based on this information alone we can conclude that the price charged to Group 2 will be
A. the same as the price charged to Group 1.
B. lower than the price charged to Group 1.
C. higher than the price charged to Group 1.
D. there is insufficient information to determine whether Group 2 will have a higher, lower or the same price as Group 1.
c. higher than the price charged to group 1
To determine the price charged to Group 2 in third-degree price discrimination, we need to compare the price elasticities of demand for the two groups.
The price elasticity of demand measures the responsiveness of quantity demanded to changes in price. A higher absolute value of elasticity indicates a higher responsiveness.
The manager knows that the price elasticity of demand for Group 1 is -2 and the price elasticity of demand for Group 2 is -1.2.
Since the absolute value of the price elasticity of demand for Group 1 (-2) is higher than the absolute value of the price elasticity of demand for Group 2 (-1.2), we can conclude that Group 1 is more price-sensitive (responsive) than Group 2.
In price discrimination, the goal is to charge a higher price to the group that is less price-sensitive (more inelastic demand) and a lower price to the group that is more price-sensitive (more elastic demand).
Therefore, based on this information alone, we can conclude that the price charged to Group 2 (the more price-sensitive group) will be lower than the price charged to Group 1.
Hence, the correct answer is B. lower than the price charged to Group 1.
To determine the price charged to Group 2 in third-degree price discrimination, we need to consider the price elasticity of demand. Price elasticity of demand measures how sensitive the quantity demanded is to changes in price.
Simply knowing the price elasticities of demand for Group 1 and Group 2 (which are -2 and -1.2, respectively) is not enough to directly conclude the price charged to Group 2.
In third-degree price discrimination, different groups of customers are charged different prices based on their price elasticity. Ideally, the price charged to a group with a more elastic demand should be lower, while the price charged to a group with a less elastic demand should be higher.
From the information given, we can determine that Group 1 has a more elastic demand compared to Group 2 (-2 < -1.2). This implies that Group 1 is more price sensitive and would likely have a lower price.
However, without specific information about the relationship between the prices charged to Group 1 and Group 2, we cannot accurately determine whether the price charged to Group 2 will be higher, lower, or the same as the price charged to Group 1.
Therefore, the correct answer is D: there is insufficient information to determine whether Group 2 will have a higher, lower, or the same price as Group 1.