3. Marginal analysis and profit maximization Suppose Ana gives haircuts on Satur

Question

3. Marginal analysis and profit maximization Suppose Ana 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 that the only significant variable cost to Ana in giving haircuts is her time. As she gives more haircuts, Ana 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, sleeping an extra half-hour, and so on. Ana's clients are a varied group willing to pay between $20.00 and $36.00 for a haircut. Assume that Ana cannot price discriminate-that is, charge different clients different prices. If Ana charges $36.00 per haircut, she will have one client per week; if she charges $32.00, she will have two; if she charges $28.00, three, and so forth. The following table contains data on the revenues and costs of Ana's haircut business as a function of her price- quantity choice. (The costs are based on the value of Ana's alternative activities, in dollar terms. For example, the total cost of the first haircut is $4- the value Ana places on reading the newspaper after breakfast.) Also, marginal profit is the additional profit Ana earns from producing one more unit of output. Marginal profit is positive when a rise in output increases total profit and negative when a rise in output causes total profit to fall

Explanation / Answer

Missing value answers:

Total revenue = 96

Marginal revenue = 12

Marginal Cost = 8

Profit = Total Revenue – Total Cost = 72

Marginal Revenue = 4

Ana maximizes profit by serving 4 customers per week and charging $24 each.

If she serves more than the optimal quantity then the marginal revenue declines.

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