What is the elasticity of demand for haircuts

Reference no: EM133344207

Question: Your cousin runs a unisex hair salon where he charges $25 per haircut and serves 400 customers, 200 college students and 200 nonstudents, who get a haircut once a month. Assume your cousin's marginal cost of providing an additional haircut, which is approximately $5, is the same whether he is cutting a student's or a nonstudent's hair. Your cousin asks for your help with pricing decisions. When you ask him why he set his current price at $25, he responds that whenever he mentions that he is considering raising the price to $30, all his customers assure him they will still patronize his establishment, but half of all students -and one fifth of all nonstudents- say they will just switch from getting a haircut once a month to getting one every other month. Therefore, he expects his monthly demand to fall to 150 students and 180 nonstudents if he increases his price to $30.

a) What is the elasticity of demand for haircuts that your cousin faces at the current price of $25 among student customers? And among nonstudent customers?

b) What would be your cousin's optimal (profit-maximizing) price of a haircut for students? And for nonstudents? Show your work.

Reference no: EM133344207

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