Question 23 Not yet answered Points out of 1.00 Demand for haircuts in the city

Question

Question 23 Not yet answered Points out of 1.00 Demand for haircuts in the city of Stopleta is given by the function P-30-Q/10, where Q is the number of haircuts per day and P is the price of a haircut. Everyone who opens a barber shop in town has a fixed cost of $100 per day which must be paid so long as a shop is in business and regardless of the number of haircuts it sells. There is also a variable cost of $2 for each customer served. Each barber shop has a capacity of 40 P Flag question customers per costs immediately, but must give 6 months notice to day. Stopleta currently has 4 barbershops. A barber shop that is open cannot escape its fixed its landlord of its intension to close. It also takes about 6 months to organize and open a new barber shop. What is the short run equilibrium price of a haircut in Stopleta? Select one: C. $10 d. $12 e. none of the above

Explanation / Answer

Option (e).

P = 30 - (Q/10) = 30 - 0.1Q

For a downward sloping demand curve, profit is maximized when Marginal revenue (MR) equals Marginal (Unit variable) cost.

Total revenue (TR) = P x Q = 30Q - 0.1Q2

MR = dTR/dQ = 30 - 0.2Q

Equating MR with MC,

30 - 0.2Q = 2

0.2Q = 28

Q = 140

P = 30 - (0.1 x 140) = 30 - 14 = $16

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