Question

Firm A has price elasticity of demand of –1.5 and a marginal cost of $30. Firm...

  1. Firm A has price elasticity of demand of –1.5 and a marginal cost of $30. Firm B has a price elasticity of demand of –2.0 and a marginal cost of $30. What is the profit maximizing price of each firm?
0 0
Add a comment Improve this question Transcribed image text
Answer #1

The markup rule can be used to determine the profit-maximizing price given the marginal cost and the price elasticity of demand. The formula is given below:

1 + ed y MC psed

Where P is the profit-maximizing price, e​​​​​​d​​​ is the price elasticity of demand and MC is the marginal cost.

Given:

Firm A:

Price elasticity of demand = -1.5

Marginal Cost (MC) = $30

Firm B:

Price elasticity of demand = -2

Marginal Cost = $30

The profit-maximizing price for both the firms is calculated below:

Firm A:

P-1+(-1.5) . -1.5% x 30 = -0.5 - 15 X 30 = 10

Firm B:

p_1+-2) x 30 = =+ x 30 = 15

Therefore, the profit-maximizing price of firm A is $10 and the profit-maximizing price of firm B is $15.

Add a comment
Know the answer?
Add Answer to:
Firm A has price elasticity of demand of –1.5 and a marginal cost of $30. Firm...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT