Question

The price elasticity of demand for the output of a profit-maximizing firm is E = −4. This firm will mark up the price of its product above marginal cost by __________ percent.

A. 25

B. 50

C. 100

D. 150

E. None of the options

Answer 1

The formula

MC = P {1 + (1/n)} , where n is the price elasticity

Solving when n = -4 , we get P:MC = 4:3

So when P is 100, MC will be 75. Percentage above = {(100-75) / 75} = 33.33%

Thus answer E .None of the above

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