Question

Suppose Latasha gives haircuts on Saturdays to make extra money. She is the only person in town cutting hair on Saturdays and therefore has some market power. Assume that she does not incur fixed costs, and the only significant variable cost to Latasha is her time. As she gives more haircuts, Latasha must increasingly forgo other valuable Saturday activities. For example, if she gives one haircut, she forgoes reading the paper after breakfast. If she gives two haircuts, she gives up reading the paper and sleeping an extra half-hour. Latasha's clients are a varied group willing to pay between $16.00 and $28.00 for a haircut. Assume that Latasha cannot price discriminate, i.e., charge different clients different prices. If Latasha charges $28.00 per haircut, she will have one client per week; if she charges $24.00, she will have two; if she charges $20.00, three, and so forth. The following table contains data on the revenues and costs of Latasha's haircut business as a function of her price-quantity choice. (The costs are based on the value of Latasha's alternative activities, in dollar terms. For example, the total cost of the first haircut is $4-the value Latasha places on reading the newspaper after breakfast.) Fill in the missing cells of the table and then use them to answer the questions that follow. Marginal Price Total Revenue Total Cost Profit Output Revenue Marginal Cost (Haircuts per week) (Dollars per haircut) (Dollars per haircut) (Dollars per week) (Dollars per haircut) (Dollars per week) (Dollars per week) 0 0 0 0 28.00 4.00 1 28.00 28.00 4.00 24.00 20.00 8.00 24.00 48.00 12.00 36.00 12.00 8.00 40.00 3 20.00 60.00 20.00 36.00 18.00 20.00 8.00 80.00 5 16.00 56.00 24.00

Answer 1

At output 4, total revenue= 80-8= $72

When output rises from 3 to 4,

Marginal revenue=$12

Marginal cost= $16

At output=4, Profit= TR-TC= 72-36= $36

ITIU PROFIT 34 Output

20 MC 115 -10 MR Output

Latasha maximizes her profit by serving 3 per week and charging $20 per haircut.

Both statements are correct.

Reason- MR<MC and profits fall after 3 haircuts.