Question

7. You are the owner of a nail salon. Your female customer's price elasticity of demand for manicures is -2.5; your male customer's price elasticity of demand for manicures is -1.2. The marginal cost of manicuring a customer's nails is $12. a. If you segment the market by gender, what price should you charge women? What price should you charge men? b. Explain intuitively why you should charge each group a different price.

Answer 1

Lerner Index = - 1 / Elasticity of demand = (P - MC) / P

(a)

(I) For Women:

- 1 / - 2.5 = (P - 12) / P

1 / 2.5 = (P - 12) / P

P = 2.5P - 30

1.5P = 30

P = $20

(II) For Men:

- 1 / - 1.2 = (P - 12) / P

1 / 1.2 = (P - 12) / P

P = 1.2P - 14.4

0.2P = 14.4

P = $72

(b)

A group with higher absolute value of elasticity has a relatively elastic demand, so they are more responsive to a change in price, hence should be charged a lower price. In contrast, a group with lower absolute value of elasticity has a relatively inelastic demand, so they are less responsive to a change in price, hence should be charged a higher price.