Suppose a restaurant has two types of customers,group A and group B.Group A customers have a price elasticity of demand equal to 6,while group B customers have a price elasticity of demand equal to 2.If the firm seeks to maximize profits by discriminating prices,and it charges group B customers $40 per meal,what price should it charge group A customers?
A)$20
B)$22
C)$24
D)$26

Question

Quizplus · Accepted Answer

To maximize profits, the restaurant should charge each group a different price based on their respective price elasticities of demand. Group A customers have a higher elasticity than Group B customers, meaning they are more sensitive to changes in price. Therefore, the restaurant should charge a lower price to Group A customers to increase their demand.

To determine the optimal price for Group A, we can use the formula:

(price elasticity of demand for Group A / price elasticity of demand for Group B) = (price for Group A / price for Group B)

Solving for the price for Group A, we get:

(6/2) = (price for Group A / $40)
Price for Group A = $24

Therefore, the best choice is C) $24.

Suppose a Restaurant Has Two Types of Customers,group a and Group