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b. If ep = -.8, initial cost 200, should Molto Delizioso raise prices, lower prices, or...

b. If ep = -.8, initial cost 200, should Molto Delizioso raise prices, lower prices, or keep them the same? Explain.

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Answer #1

Increase price

A profit is maximum at MR=MC

MC cannot be negative so the firm can maximum profit if the firm has positive marginal revenue.

marginal revenue is positive when the demand is elastic. an MR=0 when e=-1 and MR<0 when -1<e<0

A price and elasticity have a positive relationship to the increase in the price increases elasticity.

the firm should increase price up to unit elastic demand to maximize revenue.

Also, it should increase the price up to pint MR=MC to maximize profit.

The given cost is positive so the firm should increase price u to the demand is elastic. (MR=MC level of output)

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