Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. $$\begin{array} { | c | c | }
\hline \text { Customer } & \begin{array} { c }
\text { Reservation Price } \
\text { (\$/Rental) }
\end{array} \
\hline \mathrm { A } & 22 \
\hline \mathrm { B } & 16 \
\hline \mathrm { C } & 12 \
\hline \mathrm { D } & 8 \
\hline \mathrm { E } & 6 \
\hline \mathrm { F } & 4 \
\hline
\end{array}$$ If Island Bikes charges a single price to all of its customers, then what price will it charge?

Question

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. $$\begin{array} { | c | c | } 
\hline \text { Customer } & \begin{array} { c } 
\text { Reservation Price } \
\text { (\$/Rental) }
\end{array} \
\hline \mathrm { A } & 22 \
\hline \mathrm { B } & 16 \
\hline \mathrm { C } & 12 \
\hline \mathrm { D } & 8 \
\hline \mathrm { E } & 6 \
\hline \mathrm { F } & 4 \
\hline
\end{array}$$ If Island Bikes charges a single price to all of its customers, then what price will it charge?

Quizplus · Accepted Answer

Island Bikes will charge $12, as it maximizes profit by setting the price where marginal cost ($3) is less than or equal to the reservation price of the customers willing to pay. At $12, customers A, B, and C will rent, maximizing profit.

Suppose Island Bikes, a Profit-Maximizing Firm, Is the Only Bike