Question

Your firm is one of ten firms producing a product. The industry elasticity of demand for your product is -1.2. The marginal cost of your product is constant at $30 and average total cost is currently $25.

Using above information, complete the below statements by selecting the correct answer.

Your firm's mark-up factor/rule is equal to

Your firm’s elasticity of demand for this product is equal to

The price of this product is equal to

Your firm's mark-up on this product is equal to

Your firm's per-unit profit on this product is equal to

Answer 1

Solution :

Given :-

Elasticity of demand = -1.5
Marginal cost = $30
Average total cost = $25

1):- Markup rule = 1/-(elasticity) = (p-MC)/p

= 1/-(-1.2) = (P-30)p

0.83 = (P-30)p

0.83P = P - 30

P-0.83P = 30

0.41P = 30

P = $73.17

2) :- Elasticity of demand will be -1.2

3):- Price of product is equal to $73.17

4) :- Mark up = 1/elasticity = 1/1.2 = 0.83

5):- Profit = ( P-ATC) ×Q, HERE Q=1

So profit per unit = P-ATC= 73.17-25 = $48.17

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