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CA Foundation · Business Economics · Price Determination in Different Markets

A coaching institute in a city sells the same course to two separate groups, students and working professionals, charging different fees because the two groups differ in price elasticity of demand. Marginal cost is the same for both. For profit maximisation, which is correct?

The institute should charge the higher fee to the group with less elastic demand. Profit maximisation requires equal marginal revenue in both markets, equal to marginal cost. Since MR depends on price and elasticity, the less elastic market must bear the higher price.

  1. ACharge the higher fee to the group with more elastic demand
  2. BCharge the higher fee to the group with less elastic demandCorrect
  3. CCharge the same fee to both groups
  4. DCharge a fee equal to marginal cost to both groups

Explanation

In third-degree price discrimination, profit is maximised by equating MR to MC in each market. Since MR = P(1 - 1/e), the same MR requires a higher price where demand is less elastic. Hence the group with less elastic demand pays more.

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