Question

You are the manager of the only janitorial service in town. The population in town consists of young college students and older retired families. An economist as a favor calculates the elasticity of demand for cleaning services of the young students to be -3, while retired folks have an elasticity of demand of -5

1. On an intuitive level, do the economist estimates of the elasticities seem reasonable? Briefly explain.

2. If it costs you $15 (MC) for each hour you spend cleaning a house, what hourly rate should you charge the young students to maximize profits?

Answer 1

The elasticity of demand of the young students = -3

The elasticity of demand retired folks = -5

On an intuitive level, economist estimates of the elasticities seem reasonable because young students are less price responsive for cleaning compared to the retired people.

Here the marginal cost is $15 (MC) for each hour spent on cleaning a house.

This uses P = MC * ed / (ed + 1)

= 15 * -3/-2

= $22.50

Hence, the hourly rate you should charge the young students to maximize profits is $22.50.