Suppose that you are the manager of a pizzeria that produces pizza at a constant

Question

Suppose that you are the manager of a pizzeria that produces pizza at a constant marginal cost of $6 per pizza. The pizzeria is a local monopoly near a college campus. During the day, only students eat at your restaurant. In the evening, while students are studying, faculty members eat there. If students have an elasticity of demand for pizzas equal to - 4 and faculty has an elasticity of demand equal to - 2 , what should your pricing policy be to maximize profits? Explain the intuition behind your result.

Explanation / Answer

The manager of pizzeria should charge lower price from students and higher price from faculty because the elasticity of demand for students is high meaning more elastic as compared to the faculty. So for students if price would decrease there would be a larger change in quantity demanded since the absolute value of elasticity of demand for students i.e 4 is greater than the absolute value of elasticity of demand for faculty i.e 2

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