Question

Drybar, a hair salon, faces a weekly demand for blowouts equal to qD = 1,040 – 20P. The salon has weekly total cost of TC(q)=0.05q^2+20q+500.

In a diagram, draw drybar’s demand curve (PD) and marginal revenue curve (MR).

In the same diagram, illustrate drybar’s average total cost curve (ATC), and marginal cost curve (MC).

Find drybar’s minimum efficient scale and label it qMES.

Find the profit maximizing level of output (q*) and price (p*).

Compute consumer and producer surplus when the salon produces the profit maximizing level of output.

Suppose you are a research analyst. You have no information on drybar’s cost structure, however you can estimate the salon’s demand function and you can observe its price and quantity.

6. Use this information (and not the TC function given above) to estimate the restaurant’s current marginal cost and the current price mark-up.

Answer 1