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Homework answers / question archive / Suppose a firm has a constant marginal cost of $10

Suppose a firm has a constant marginal cost of $10

Economics

Suppose a firm has a constant marginal cost of $10. The current price of the product is $25, and at that price, it is estimated that the price elasticity of demand is -3.0.

a. Is the firm charging the optimal price for the product? Demonstrate how you know.

b. Should the price be changed? If so, how?  

 

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Part A

MC=MR=P(1+1/n)

$10=P(1+1/-3)

$10=2/3P

P=$10*3/2=$15

The optimal price to be charged is $15, meaning with the price of $15, the firm is not charging optimal price.

Step-by-step explanation

Part B

Yes, the price should be changed to suit the profit maximisation price and the intended optimal price,hence the price should be changed by $25-$15=$10

It should be changed to $15 or be reduced by $10.

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