Important information about own price elasticity
Local Credit Union AB is researching a fee increase for non-customers who use their ATMs. Credit Union customers can use the ATMs without a fee. The CU's research shows that when they raise their ATM fee, they actually increase the number of new checking account customers per day the cross price elasticity is negative. Non-customers get tired of paying the fee so they become customers. However, as ATM fees increase, you lose non-customer transactions at your ATMs. The non-customer demand for credit union ATM transactions is given by the equation
Q = 19,000 - 6,000P. Right now the Credit union handles 10,000 non-customer ATM transactions per day at a fee of $1.50.
a. What is the own price elasticity for ATM fees charged to non-customers? At the current ATM fee, should you raise or lower your ATM fees? Why?
b. What should your new ATM fee be if your marginal cost of servicing an ATM transaction is $0 (zero) and you are only considering maximizing profits derived from ATM fees?