Question

Suppose there is only one yoga studio in town. The marginal cost of producing yoga sessions is
as follows: MC = 12. The yoga studio faces the following market demand function: Q = 20 − (1/2)P,
and marginal revenue MR = 40 − 4Q.
1. Calculate the profit-maximizing price, output, and profit for the yoga studio.

2. Graph the market demand curve, the studio’s marginal revenue and marginal
cost curves, indicating profit, price, and quantity at the profit-maximizing level of output.

3 Suppose that the owner of the studio has determined that each of her 30 regulars
has the following identical demand for yoga sessions: Q = 4 − (1/4)P. The studio’s marginal
revenue from one of these consumers, then, is MR = 16−8Q. The owner wants to use a two-part
pricing scheme based on this information, in which she charges admission to the studio and a
per-session price. The studio’s costs have not changed in this scenario. How should the owner set
the admission fee and the per-session price? How many sessions will she sell, and what will her
profit be?

Answer 1