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Author Question: The local barber in a small town has decided to raise the price of his haircuts by 25 because he ... (Read 47 times)

maychende

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on: Jun 29, 2018
The local barber in a small town has decided to raise the price of his haircuts by 25 because he realizes he is the only barber in town and of course everyone has to get a haircut.
 
  His rational is that the demand for his services is price inelastic? What mistake is he making?

Question 2

How much is a bond that pays 80 in coupon payments for 4 years and 1,000 at the end of the fourth year worth if the interest rate is 6?
 
  A) 855.46 B) 1,045.56 C) 1,069.30 D) 1,140.00


brittanywood

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Reply #1 on: Jun 29, 2018
Answer to Question 1

The mistake that he is making is that he is ignoring possible substitutes right where he lives and works. A 25 increase in the price of haircuts may induce many people to start cutting their hair at home and have their parents or spouses do it for them.

Answer to Question 2

C


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