Which of the following statements is true? a

Economics Dec 17, 2020

Which of the following statements is true?

a. The higher the average cost, the lower the profit-maximizing price

b. The more elastic the demand, the higher is the desired markup

c. The higher the marginal cost, the lower the profit-maximizing price

d. The more elastic the demand, the lower is the desired markup

Expert Solution

The answer is D. If the demand curve is elastic it heading towards horizontal. In profit maximization the firm restricts output to the point where marginal revenue is equal to marginal cost. When the firm increases price, if the demand is more elastic the lower the desired markup.

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