Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
2. Suppose you have an elasticity of - 2 and the CMg of $ 15.45 per unit. Determine the
CMg (marginal cost)
Expert Solution
Step 1
Price Elasticity of Demand measures the percentage change in quantity demanded due to percentage change in the price of a good or service. A firm maximizes profit by producing output at a level where Marginal Revenue is equal to Marginal Cost ie MR = MC.
In order to find the profit maximizing price, we use the following formula
P = MC (e / e + 1)
where P is Price
MC is Marginal Cost
e is Price Elasticity of Demand
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