You are the manager of a gas station in a small town, and your goal is to maximize profits. Based on your experience, the elasticity of demand of B.C. residents for a car wash is -2, while that of non-BC residents is -1.5. Your marginal cost is $6.
a. Are the conditions necessary for price discrimination to be an effective means of enhancing profits being met? Explain.
b. What is the profit-maximizing price to charge a BC resident for a car wash?
c. What is the profit-maximizing price to charge an Albertan for a car wash?
Sample Solution