Answer to Question #41651 in Macroeconomics for ash
You are the manager of a gas station in a small town in the United States, and your goal is to maximize profits. Based on your experience, the elasticity of demand of Texans for a car wash is –2, and that of non-Texans is –1.5.Your marginal cost is $6.
Are the conditions necessary for price discrimination to be an effective means of enhancing profits being met? Explain fully
Elasticity of demand: Texans = –2, non-Texans = –1.5. MC = $6. There are two conditions that must be met if a price discrimination scheme is to work. First the firm must be able to identify market segments by their price elasticity of demand and second the firms must be able to enforce the scheme. For example, airlines routinely engage in price discrimination by charging high prices for customers with relatively inelastic demand - business travelers - and discount prices for tourist who have relatively elastic demand. The airlines enforce the scheme by making the tickets non-transferable thus preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler (arbitrage). Airlines must also prevent business travelers from directly buying discount tickets. Airlines accomplish this by imposing advance ticketing requirements or minimum stay requirements conditions that would be difficult for average business traveler to meet. So, in this case provided conditions will make price discrimination effective.