ou own two massage parlours located in a big city, one of them in a central residential neighbourhood and the other on the outskirts. The price elasticity of the demand of the customers of the residential neighbourhood is, in absolute value, 1.25 and that of the clients who live on the outskirts is, in absolute value, 2.5. The marginal cost of a full massage is € 12 regardless of the location of the salon. a) If your goal is to get the maximum possible benefit, what price should you charge in each salon for a full massage? b) Use the Lerner index to determine the market power it holds in each of the segments.
ou own two massage parlours located in a big city, one of them in a central residential neighbourhood and the other on the outskirts. The price elasticity of the demand of the customers of the residential neighbourhood is, in absolute value, 1.25 and that of the clients who live on the outskirts is, in absolute value, 2.5. The marginal cost of a full massage is € 12 regardless of the location of the salon. a) If your goal is to get the maximum possible benefit, what price should you charge in each salon for a full massage? b) Use the Lerner index to determine the market power it holds in each of the segments.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Exercise 4.7
You own two massage parlours located in a big city, one of them in a central residential neighbourhood and the other on the outskirts. The
a) If your goal is to get the maximum possible benefit, what price should you charge in each salon for a full massage?
b) Use the Lerner index to determine the market power it holds in each of the segments.
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