Question

Which of the following statements is correct?

a. The markup pricing rule that is derived from the rule for profit maximization can be used as a substitute for determining the profit-maximizing level of output by equating marginal revenue and marginal cost.
b. It is reasonable to assume that a profit-maximizing firm will never operate in the inelastic portion of its demand curve.
c. The ability of a profit-maximizing firm to mark up price above average cost is unaffected by the price elasticity of demand for the firm's output.
d. The markup factor and the price elasticity of demand are positively related, i.e., as the price elasticity of demand increases, the markup factor that the profit-maximizing firm can apply to its marginal cost in setting price increases as well.

Answer 1

Answer: It is reasonable to assume that a profit-maximizing firm will never operate in the inelastic portion of its demand curve.

Step-by-step explanation:

It should be noted that a firm that profit maximizing will not operate in the inelastic portion of its demand curve because at that point, the firm isn't maximizing profit.

When there's an inelastic demand, an increase in price will bring about a less than proportionate reduction in the quantity of the goods that's demanded. In such case, if the firm operates at the inelastic portion of its demand curve, when it increases price, this will lead to a reduction in income and profit will not be maximize.