Question

A buffet restaurant is considering offering a discounted price to senior citizens over age 60. The firm knows the elasticity of demand for senior citizens is -4 while the elasticity of demand for younger customers is -2. The marginal cost of a buffet meal is $7.5.

1. What price should the restaurant charge older customers?

2. What price should the restaurant charge younger customers?

Answer 1

a. For profit maximisation

(P-MC)/P = 1/e

here for senior citizens

(P-7.5)/P = 1/(4)

P = 10

b.

here for younger customer

(P-7.5)/P = 1/(2)

P = 15

remember we will not consider the negative value in the prie elastiity of demand.