Gotham Bridge and Tunnel Authority practices peak-load pricing. During peak hours when bridges are at capacity...
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Gotham Bridge and Tunnel Authority practices peak-load pricing. During peak hours when bridges are at capacity and the price elasticity of demand is −3, Gotham charges $25 per bridge crossings. During off-peak hours the price elasticity of demand is −5. How much should Gotham charge during off-peak hours to maximize profit?
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$18
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$24
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$20
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$21
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There is not enough information to answer this question.
Homework Answers
Correct Answer:
D
Working note:
As per the Lerner index,
(P-MC)/P = 1/|E|
(25 - MC)/25 = 1/3
MC = 25 - 25/3
MC = $16.67
When E = -5
(P - 16.67)/P = 1/5
5P - 5*16.67 = P
P = 5*16.67/4
P = $20.84 or $21
So, price should be $21.
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