B. Marginal analysis and profit maximization AB A5
Imagine l-tathy gives haircuts on Saturdays to make extra money. She is the only person in town cutting hair on Saturdays and
therefore has some market power. Assume that she does not incur fixed costs, and the only significant variable cost to ltathy in
giving haircuts is her time. As she gives more haircuts, Rathy must increasingly forgo other valuable Saturday activities. For
example, if she gives one haircut, she forgoes reading the paper after breakfast. If she gives two haircuts, she gives up reading
the paper, sleeping arr extra half-hour, al'ld so on.
kIathy's clients are a varied group willing to pay between $20.00 and $20.00 for a haircut. Assume that is-Iathy cannot charge her
varied clients different prices. If ltathy charges $20.00 per haircut, she can have one client per week; if she charges $20.00, she
can have two; if she charges $24.00, three, and so forth. The following table contains data for the revenues and costs of i4'athy's
haircut business as a function of her pr-ice—c|uantity choice. {The costs are based on the value of l~'.'athy's alternative actiyities, in
dollar terms. For example, the total cost of the first haircut is $3.00—the value to ltathy of being able to read the paper after
breakfast.) Also, marginal profit is the additional profit Hiathy eams from producing one more unit of output. Marginal profit is
positiye when a rise in output increases total profit and negative when a rise in production causes total profit to fall.