When selling its famous Levi 501 jeans, Levi Straus price discriminates between the European and American markets, selling the product at a higher price in Europe than in the United States. The following equations are hypothetical demand curves for Levi 501s in Europe and in America. We have expressed the price in dollars in both markets, and quantity is thousands of units per year.
European Demand: QDE = 150 – p
American Demand: QDA =250 – 4p
a. On separate scale diagrams, one for Europe and one for America, plot the two demand curves.
b. Recalling that a straight-line demand curve has an associated MR curve that has twice its slope, plot the two MR curves.
c. Suppose Levi Strauss has a constant marginal cost of $15 per unit. Plot the MC curve in both diagrams.
d. What is the profit-maximizing price in each market? Explain why profit maximization requires that MC be equated to MR in each market segment.
e. Compute the price elasticity of demand (at the profit-maximizing points) in each market segment. (You may want to review Chapter 4 on elasticity at this point.) Does the market segment with less elastic demand have the higher price?