The price elasticity of demand for senior citizens purchasing coffee from McDonald's is -5 while non senior citizens have a price elasticity of demand equal to -1.25. If is cost McDonald's $0.02 to produce a coffee, the optimal price for a cup of coffee for non senior citizens and resultant marginal cost under third-degree price discrimination are
A. $0.004 and $0.02.
B. $0.02 and $0.80.
C. $0.10 and $0.02.
D. $10 and $0.20.
To find the optimal price for non senior citizens and the resultant marginal cost under third-degree price discrimination, we need to use the information given about the price elasticity of demand for senior citizens and non senior citizens.
Price elasticity of demand measures the responsiveness of demand to a change in price. When the absolute value of the price elasticity of demand is greater than 1, it indicates that demand is elastic, meaning that a small change in price leads to a large change in quantity demanded. Conversely, when the absolute value is less than 1, it indicates that demand is inelastic, meaning that a change in price has a relatively smaller effect on the quantity demanded.
Here, the price elasticity of demand for senior citizens is -5, and for non senior citizens is -1.25. As both are negative, we can determine that both groups have elastic demand.
Under third-degree price discrimination, the goal is to set different prices for different groups of consumers in order to maximize profits.
Now, let's analyze the given options:
A. $0.004 and $0.02: This option does not make sense because the price for non senior citizens is extremely low compared to the cost of production.
B. $0.02 and $0.80: This option also does not make sense because the price for non senior citizens is too high compared to the cost of production.
C. $0.10 and $0.02: This option seems more reasonable. The price for non senior citizens is higher than the cost of production but not excessively high. The price for senior citizens would be lower, but we do not know the cost of production for them.
D. $10 and $0.20: This option does not make sense because the price for non senior citizens is extremely high compared to the cost of production.
Based on the analysis, the most reasonable option is C. $0.10 and $0.02.
However, please note that we cannot determine the exact resultant marginal cost under third-degree price discrimination with the information given.