Suppose you own two hair salons, one in Sydney, with lots of competition, and one in Broken Hill, with little competition. In Sydney, the price elasticity of demand is -2, while in Broken Hill, it is -1.5. Assume the marginal cost of providing a haircut is $20. What are the optimal prices and markups in each location? Question 4 Suppose that on a tropical island, there are 12 units of capital available and 30 units of labour. Those inputs can be used to produce coconut rum and hammocks. a. If the marginal rate of technical substitution between labour and capital (MRTSLK) in the rum industry is 4 and the MRTSLK in the hammock industry is 6, is the economy achieving input efficiency? b. If you indicated in part (a) that the economy was not input-efficient, suggest a reallocation of labour and capital that will lead to a Pareto improvement. 2 Question 5 The supply and demand for monthly gym memberships are given as QS = 10P-300 and Q° = 600-10P, where P is the monthly price of a membership. (a) If the current price for memberships is $50 per month, is the market in equilibrium? (b) Would you expect the price to rise or fall? (c) If so, by how much?
