Question

A firm in the market for designer jeans has some degree of monopoly power. The demand curve it faces has a price elasticity of demand of -5​, while the price elasticity demand of the market is -4. ​Moreover, the firm has a constant marginal cost of ​$65.00. Using the rule of thumb for​ pricing, calculate the​ firm's profit-maximizing price.

Answer 1

Answer:

So the firm's profit-maximizing price is  $81.25

Explanation:

Given:

• Elasticity of demand of -5
• Constant marginal cost of ​$65.00

As we know that, the firm's profit-maximizing price has the following formula:

Price= Marginal cost* $\frac{ elasticity }{ elasticity + 1}$

<=> Price = ​$65*$\frac{-5}{-5+1}$

<=> Price = $81.25

So the firm's profit-maximizing price is  $81.25

Answer 2

Answer:

The firm's profit maximization price = $81.25

Explanation:

We are given:

Marginal cost MC = $65

Elasticity of demand ED = -5

Therefore, Using the rule of thumb pricing, we have the equation:

$P = \frac{MC}{1+(1/ED)}$

$P = \frac{65}{1+(1/-5)}$

$P = \frac{65}{0.8}$

P = $81.25

Therefore the firm's profit maximization price is $81.25