Question

Suppose Kate 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 Kate is her time. As she gives more haircuts, Kate 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. Kate's clients are a varied group willing to pay between $20.00 and $30.00 for a haircut. Assume that Kate cannot price discriminate, i.e., charge different clients different prices. If Kate charges $30.00 per haircut, she will have one client per week; if she charges $27.50, she will have two; if she charges $25.00, three, and so forth. The following table contains data on the revenues and costs of Kate's haircut business as a function of her price- quantity choice. (The costs are based on the value of Kate's alternative activities, in dollar terms. For example, the total cost of the first haircut is $5- the value Kate 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. Output (Haircuts per week) Price (Dollars per haircut) Total Revenue (Dollars per week) Marginal Revenue (Dollars per haircut) Total Cost (Dollars per week) Marginal Cost (Dollars per haircut) Profit (Dollars per week) 5.00 30.00 25.00 20.00 30.00 55.00 75.00 30.00 27.50 25.00 22.50 20.00 5.00 10.00 5.00 10.00 20.00 40.00 70.00 25.00 45.00 55.00 10.00 30.00 100.00 30.00

Answer 1

Solution:-

Output	Price	Total Revenue	Marginal Revenue	Total Cost	Marginal Cost	Profit	Marginal Profit
0	---	0	---	0	---
1	30	30	30	5	5	25	25
2	27.50	55	25	10	5	45	20
3	25	75	20	20	10	55	10
4	22.50	90	15	40	20	40	-15
5	20	100	10	70	30	30	-10

The TR,TC and Profits curves are:

Total Revenue Total Cost TOTAL REVENUE, TOTAL COST, AND PROFIT (Dollars per week) Profit QUANTITY OF OUTPUT (Haircuts per week)

Now We plot the MR and MC graphs:

Marginal Revenue Marginal Cost PRICE AND COST (Dollars per haircut) • O 5 QUANTITY OF OUTPUT (Haircuts per week) QUE

Kate maximizes profits by serving 3 per week and charging $25 per haircut.

From the above table, we can see that all of the 2 options would apply