Imagine there are three towns. In town X, there's only 1 hairdresser. In town Y, there...
Imagine there are three towns. In town X, there's only 1 hairdresser. In town Y, there are many hairdressers abut they are exactly the same. In town Z, there are many hairdressers but each barber is different from the other. A barber in which town faces the lowest price elasticity of demand?
Town X
Town Y
Town Z
They all have the same elasticity
Homework Answers
Ans. Town X
In a perfectly competitive market as in Town Y, each barber's service is perfect substitute to the other, so, any increase in price by an individual seller means that he will loose all his customers. Thus, demand faced by the barbers in Town y is perfectly elastic.
In a monopolistic market as in Town Z, each barber's service is differentiated but still substitutable (not perfectly though). So, they have a control over the price. So, increase in price may result in loss of few customers but not all. So, demand is not perfectly elastic i.e. relatively inelastic than the perfect competition.
In monopoly like in Town X, there is no substitute to the only seller's service. Thus, increasing price will lead loss of least customers as compared to the other two market structures. Thus, demand faced is least elastic.
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