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Suppose that the eye doctor offers senior residents a discounted price for an eye exam. The demand function for senior residents is Qs = 50 - Ps, and the demand function for the general public is Qg = 60 - Pg. The marginal cost for an eye exam is constantly $30.
(a) Given that the marginal revenue curve for senior residents is Ps = 50 - 2Qs, and the marginal revenue curve for the general public is Pg = 60 - 2Qg, what prices will the eye doctor charge for senior residents and the general public to maximize profits?
(b) Calculate the price elasticity of demand for each group at current prices (Hint: ?Qs/?Ps = -1 and ?Qg/?Pg = -1).
(c) Compare the price and price elasticity of demand for each group in part (a) and (b), can you conclude the optimal rule for charging prices to each group when practicing third-degree price discrimination?
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