Question

A certain company's main source of income is a mobile app. The function h models the company's annual profit (in millions of dollars) as a function of the price they charge for the app (in dollars).

Which of the following options represents the correct relationship between app price and annual profit?

a) There is no relationship between app price and annual profit.
b) As app price increases, annual profit decreases.
c) As app price increases, annual profit increases.
d) Annual profit remains constant regardless of app price.

Answer 1

The correct relationship between app price and annual profit depends on the demand's response to price changes. Profits rise with the app price until the point where marginal revenue equals marginal cost; beyond this point, profits may decrease.

Step-by-step explanation:

The relationship between app price and annual profit for a company can be determined by understanding the fundamental economics concepts of total revenue, total cost, marginal revenue, and marginal cost. According to economic principles, profits are highest when the company sets the output level where total revenue is greatly above total cost, and not necessarily the level where revenue is maximized because profits consider costs.

As the app price increases, it can potentially lead to an increase in annual profit if demand remains stable or does not fall significantly. However, if the app price increases too much, demand may decrease substantially, leading to a decrease in total revenue and profit. Therefore, the relationship could be characterized by option (c) As app price increases, annual profit increases, but only up to the point where marginal revenue (MR) equals marginal cost (MC). Beyond this point, increasing the price might actually decrease profit as marginal costs will start to exceed marginal revenue.