What is the elasticity of demand for haircuts

Reference no: EM133711103

Case: 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 S5, 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 525, 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 would fall to 150 students and 180 nonstudents if he increased 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.

c) Identify the type of advanced pricing strategy that consists in setting one price for students and a different price for nonstudents. Justify your answer.

Reference no: EM133711103

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