Question

A firm in the market for designer jeans has some degree of monopoly power. The demand curve it faces has a price elasticity of demand of -5​, while the price elasticity demand of the market is -4. ​Moreover, the firm has a constant marginal cost of ​$65.00. Using the rule of thumb for​ pricing, calculate the​ firm's profit-maximizing price.

Answer 1

So the firm's profit-maximizing price is $81.25

Step-by-step explanation:

Given:

• Elasticity of demand of -5
• Constant marginal cost of ​$65.00

As we know that, the firm's profit-maximizing price has the following formula:

Price= Marginal cost*
`( elasticity )/( elasticity + 1)`

<=> Price = ​$65*
`(-5)/(-5+1)`

<=> Price = $81.25

So the firm's profit-maximizing price is $81.25

Answer 2

The firm's profit maximization price = $81.25

Step-by-step explanation:

We are given:

Marginal cost MC = $65

Elasticity of demand ED = -5

Therefore, Using the rule of thumb pricing, we have the equation:

`P = (MC)/(1+(1/ED))`

`P = (65)/(1+(1/-5))`

`P = (65)/(0.8)`

P = $81.25

Therefore the firm's profit maximization price is $81.25