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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 Texans for a car wash is -2, while that of non-Texans is -1.5. Your marginal cost is $6.

AAre the conditions necessary for price discrimination to be an effective means of enhancing profits being met? Explain.
BWhat is the profit-maximizing price to charge a Texan for a car wash?
CWhat is the profit-maximizing price to charge a Californian for a car wash?

Verified Answer :

taskmasters

a. No. Since the good that I am selling
is inelastic considering the elasticity given in and outside Texas, having a
lower price than non-Texan gas stations would have less impact on the quantity
demanded.

b. The profit-maximizing price to
charge a Texan for a car wash would be $12.

c. The profit-maximizing price to
charge a Californian for a car wash would be $18. 

(See attached for the calculations.)

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