Question

The Super Global International Food Market is filled with nuts, books, vegetables, fruits, rice, foreign DVDs, international magazines and more. Find foods from Armania, Turkey, Russia, India and beyond. The owner takes pride in offering fruits and vegetables at competitive prices. Super Global currently sells papaya for $1.60/pound. The company believes that $1.60 is its optimal price. The company's variable cost is $0.95/pound. Calculate the elasticity coefficent that would make $1.60/pound the optimal price. Round your answer to one decimal place.

Answer 1

To determine the elasticity coefficient for papaya at the optimal price, we assume that the firm is maximizing profit where marginal revenue equals marginal cost. The elasticity coefficient is calculated using the price and marginal cost, resulting in a value of 0.7 when rounded to one decimal place.

Step-by-step explanation:

The question requires us to calculate the elasticity coefficient that would make the selling price of papaya optimal for the Super Global International Food Market. Given that the optimal selling price is $1.60 per pound and the variable cost is $0.95 per pound, we can infer that the optimal price is where marginal cost equals marginal revenue, which is a condition for profit maximization in a competitive market.

Tbe typically use the formula that relates price elasticity of demand (PED) with marginal cost (MC), marginal revenue (MR), and price (P):

PED = (P - MC) / (P - MR)

However, without additional data on the quantity sold, demand curve, or the total revenue, we cannot compute an exact elasticity coefficient. We know that for profit maximization, MR should be equal to MC, thus simplifying our equation to:

PED = P / MC - 1

If we plug in the given values:

PED = 1.60 / 0.95 - 1

This results in a PED of approximately 0.7, rounded to one decimal place. Therefore, an elasticity coefficient of 0.7 would make $1.60 per pound the optimal price for papaya.