You are the only pharmacist in a small town; the next closest drugstore is 50 miles away. The population in your town consists of young farmers and older retired families. You have noticed that the young farmers are less sensitive to price changes than the retired population. Specifically, you have found that the working population has an own price elasticity of demand of −2 and the retired farmers have an own price elasticity of −4. How can you use this information to your advantage? Do the necessary calculations to support your answer.
Answer - Since there is only one pharmacist present , this becomes a clear of a monopoly. Being a monopoly , price discrimination can be practised. Since the population consists of two different classes of population , third degree price discrimination can be done by charging different price from different consumers.
The consumer who have greater inelastic demand i.e retired workers should be charged a greater price because their demand is least likely to decline as compared to working population. The working population can also be charged a greater price than MC , but this should be less than retired people because of comparatively greater elastic demand than retired once. In this way the profits could be earned in this monopoly.
You are the only pharmacist in a small town; the next closest drugstore is 50 miles...
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