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CA Foundation · Business Economics · Price Determination in Different Markets

A cement company sells in two separate markets. In Market A the price elasticity of demand is 4 and in Market B it is 1.5. If the company practises third-degree price discrimination to maximise profit, what is the likely outcome?

The company will charge a higher price in Market B. Under third-degree discrimination, marginal revenue is equalised across markets, and MR = P(1 - 1/e). The market with less elastic demand (Market B, e = 1.5) therefore bears the higher price, while the more elastic Market A gets the lower price.

  1. AHigher price in Market A than in Market B
  2. BHigher price in Market B than in Market ACorrect
  3. CSame price in both markets
  4. DPrice equals marginal cost in both markets

Explanation

Profit maximisation requires equal marginal revenue in both markets. MR = P(1 - 1/e). With the same MR, the market with the lower elasticity must have the higher price. Market B has lower elasticity (1.5), so its price is higher. Charging the same price would make MR differ, so profit would not be maximised.

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