Question

Suppose a monopoly's price elasticity of demand equals - 5 and the marginal cost of production equals $150.00. The profit-maximizing price is $ 187.50 . (Enter a numeric response using a real number rounded to two decimal places.) What will be the firm's markup? When maximizing profit, the monopoly's markup is percent. (Round your response to the nearest percent.)

Answer 1

The firm's markup is 20 percent.

Step-by-step explanation:

In order to calculate the firm's markup, we first need to calculate the firm's cost of production. Given that the marginal cost of production is $150.00, the firm's cost of production is constant for each unit produced. The markup is calculated as the profit-maximizing price minus the marginal cost, divided by the profit-maximizing price, and multiplied by 100 to convert it into a percentage.

In this case, the profit-maximizing price is $187.50 and the marginal cost is $150.00. Therefore, the markup is (($187.50 - $150.00) / $187.50) * 100 = 20 percent.