4. 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:
a. the higher elasticity of demand.
b. the lower elasticity of demand.
c. richer members.

Question

4. 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:
a.     the higher elasticity of demand.
b.     the lower elasticity of demand.
c.     richer members.

BlackTom AI · Accepted Answer

Let's restate the problem to ensure clarity: a monopolist can segment buyers into two groups and charge different prices to each group. To maximize profit, to which group should the higher price be charged?

Option a: charge the higher price to the group with the higher elasticity of demand. This is typically suboptimal because higher elasticity means consumers are more responsive to price changes; raising price would cause a larger drop in quantity demanded, reducing total revenue and profit.

Option b: charge the higher price to the group with the lower elasticity of demand. This aligns with fundamental pricing discrimination logic: when demand is less responsive to price (lower elasticity), raising price leads to a smaller decrease in quantity demanded, increasing revenue and profit from that group more effectively than if you charged a high price to a group with high elasticity.

Option c: charge the higher price to richer members. While wealthier consumers may have a greater willingness to pay, the standard two-group price discrimination framework emphasizes differences in price sensitivity (elasticity) rather than wealth per se. A wealthier group could still have a relatively elastic or inelastic demand depending on preferences, substitutes, and the nature of the good; thus wealth alone is not the controlling factor for setting a higher price.

Option d: No answer text provided. This choice is not informative about the economic mechanism and can be ignored in evaluating the standard model.

In summary, the economically correct principle is that the monopolist charges a higher price to the group with the lower elasticity of demand, because this group is less responsive to price changes and thus yields greater incremental profit when price is raised. The other options misidentify the role of elasticity or rely on factors (like wealth) that do not universally determine optimal pricing in the two-group discrimination framework.

ECNM1116.32925.202530 Review Questions Chapter 12 Pure Monopoly

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