Question

1.The price elasticity of demand for senior citizens purchasing coffee from McDonald's is estimated to be -5 while non-seniors have a price elasticity of demand of -1.25. If it costs McDonald's 40 cents to produce a cup of coffee, the optimal price for a cup of coffee for senior citizens and resultant marginal cost under third-degree price discrimination are, respectively:

a.$1.20 and $.40

b.$.32 and $.40

c.$.50 and $.40

d.$.45 and $.80

2.During spring break students have a price elasticity of demand for a trip to FL of -3. How much should an airline charge for a ticket if the price it charges the general public is $360? Assume the general public has an elasticity of -2 (Hint: What is MC?).

a.$240 b.$260 c.$250 d$270

Answer 1

1. Use the rule P = MC * (ed)/(ed + 1)

optimal price for a cup of coffee for senior citizens = 0.40 * (-5)/(-5 + 1) = $0.50

Resultant marginal cost = $0.40

Select c.$.50 and $.40

2. price it charges the general public is $360. general public has an elasticity of -2. This gives the marginal cost MC = 360 * (1 - 1/2) = 180.

This gives the price for students = 180 x (-3) / (-3 + 1)

= 270

Select d. $270