Economic Case

ECON5503 Group Assignment

Question 1

a) There is only one dry cleaning store in Harlem and the residents of Harlem have no other choice of dry cleaning stores (unless they travel to another suburb at additional expense and inconvenience) and thus they are “forced” to use George’s store. This suggests that George has a monopoly in this suburb and it is noted that he charges all customers in all suburbs a uniform price.

However, in order to operate a more ethical business practice to the benefit of his poorer customers in Harlem, George can implement third-degree price discrimination and still achieve maximum economic profit. Third-degree price discrimination is based on location and group. Harlem residents are usually not willing to pay as much as those in rich neighbourhoods because of their lower incomes. It is further assumed that the consumer demand for dry cleaning services is different in Harlem as compared to the rich neighbourhoods and by charging a uniform price, George has ignored this fact. George should in fact set different prices for each group since the elasticities of demand are different. Each group has its own demand curve and George can price discriminate by setting a higher price in the rich neighbourhoods where demand is more inelastic and lower prices in Harlem where demand is more elastic. This is illustrated in Figures 1 and 2 below.

ECON5503 Group Assignment

Question 1

a) There is only one dry cleaning store in Harlem and the residents of Harlem have no other choice of dry cleaning stores (unless they travel to another suburb at additional expense and inconvenience) and thus they are “forced” to use George’s store. This suggests that George has a monopoly in this suburb and it is noted that he charges all customers in all suburbs a uniform