Question

Suppose a firm makes its product in one factory, but it sells it in three different and separate markets. In market A, the demand elasticity is -2.6. In market B, demand elasticity is -2.8, and in market C, demand elasticity is -4.2. In which market will a profit maximizing firm set the highest price?

a. Market A

b. Market B

c. Market C

Answer 1

Option A.

• Price elasticity of demand refers to the change in quantity demanded of a good in accordance with the changes in its price.
• It is always considered to be negative as the quantity demanded decreases when the price increases.
• Given the price elasticity of demand for the firms A, B and C are -2.6, -2.8, -4.2 respectively.
• That is in terms of highly elastic demand, we can sort the firm's as, C > B > A.
• That, is The firm C has the highest elastic demand and firm A has the lowest elastic demand for the product.
• As Firm A has the lowest elasticity of demand for its products, it can charge highest price than firm B and firm C.