Question

There are two hair salons located on Main Street, which have different unit cost. The low-cost salon, call it Cheap - Cuts, is located at the east end of town, x = 0. The high cost salon, the Ritz, is located at the west end, x = 1. In particular, Cheap - Cuts has a constant unit cost of Ccc whereas the Ritz has a constant unit cost of CR. We know Ccc < CR. There are 100 potential customers who live along the mile stretch, and they are uniformly spread out along the mile. Consumers are willing to pay $50 for a haircut done at their home. If a consumer has to travel to get a haircut then a travel cost of $5 per mile is incurred (Let's only consider one way traveling cost). Each salon wants to set a price for a haircut that maximizes the salon's profit.

Are demand functions facing the two salons affected by the fact that one salon is high - cost and the other is low-cost? Why?

Answer 1

The demand functions for Cheap - Cuts and the Ritz are influenced by their respective unit costs, as well as the consumers' travel costs. The difference in costs affects each salon's pricing strategy and, consequently, the demand each salon faces.

Step-by-step explanation:

The demand functions facing the two salons on Main Street are indeed affected by the fact that one is high-cost and the other is low-cost. The main reason for this is the difference in unit costs between Cheap - Cuts (Ccc) and the Ritz (CR), with Ccc being less than CR. Since customers incur a travel cost of $5 per mile, their total cost for a haircut includes both the salon's price and their travel expense.

Customers closer to Cheap - Cuts might favor it due to lower prices, while those nearer to the Ritz may choose it for convenience despite higher prices. Each salon must set their haircut price considering these factors to maximize profit, and this pricing strategy will impact the demand they face.

As the Ritz has a higher unit cost, it may have to charge more to cover its costs and earn a profit, potentially reducing demand. On the other side, Cheap - Cuts can offer more competitive pricing due to its lower unit cost, potentially increasing its demand if customers consider the salon's price worth the travel. Therefore, the demand functions for both salons are influenced by their respective costs and the consumer's travel costs, along with the willingness to pay for a haircut at different locations.