Question

In: Economics

You are the manager of a gas station and your goal is to maximize profits. Based...

You are the manager of a gas station and your goal is to maximize profits. Based on your past experience, the elasticity of demand by Ohioans for a car wash is -3, while the elasticity of demand by non-Ohioans for a car wash is -1.5. If you charge Ohioans $9 for a car wash, how much should you charge a man with a Kentucky license plate for a car wash?

A.

$6

B.

$15

C.

$18

D.

$9

Solutions

Expert Solution

Answer
Assuming the marginal cost for both is same
P=MC/(1+(1/e)
e=elasticity
9=MC/(1+(1/(-3))
9+9/(-3)=MC
MC=9-3
MC=6
------
the price for non-Ohioans means the Kentucky license plate person
P=6/(1+(1/(-1.5))
=18
The price is $18
option C

Rahul Sunny answered 2 years ago
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