Question

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.
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 Texan for a car wash?
c. What is the profit-maximizing price to charge a Californian for a car wash?

Answer 1

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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