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:
Where P is the profit-maximizing price, ed 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:
Firm B:
Therefore, the profit-maximizing price of firm A is $10 and the profit-maximizing price of firm B is $15.
Firm A has price elasticity of demand of –1.5 and a marginal cost of $30. Firm...
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