Mark owns ABC Karate . He has a 2-yr lease and those monthly payments are fixed
ID: 1254965 • Letter: M
Question
Mark owns ABC Karate . He has a 2-yr lease and those monthly payments are fixed over that time period. Mark wants to increase his revenues and is trying to decide to raise or lower the monthly fees he charges each student. If his enrollment increases he adds labor costs as he provides a student-teacher ratio of 6 to 1.a. If he believes that demand for karate lessons are elastic and wishes to increase monthly revenue, should Mark raise or lower lesson fees? Justify your answer.
If demand for karate lessons is inelastic and Mark wishes to increase profit, what information should he weigh to determine if he should rasie or lower lesson fees
Explanation / Answer
a. If the demand for karate lessons is elastic, Mark should lower the price of lessons. This will cause an upward movement in the demand curve increasing the quantity. In this casue, the substitution effect is greater than the income effect. If the demand is inelastic, mark should increase the price. Since the demand is so high, incresing the demand will reduce the quantity only slightly. What he should first consider, is if there are close substitutes nearby and if so what are the prices they are charging. He should then increase his price but to a point slighly lower than his competitor. Hope this helps
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