If at its production level, the manager of a firm with market power has a marginal cost of $1.25, is charging a price of $5.00 and has estimated the price elasticity of demand to be 1.3, the manager is charging the profit- maximizing price.

Question

Quizplus · Accepted Answer

Given the price elasticity of demand (PED) is 1.3 and using the formula for the profit-maximizing condition under monopolistic or imperfect competition (P = MC / (1 + 1/PED)), the current price does not reflect the profit-maximizing price since the calculation with the given numbers does not match the current price of $5.00.

If at Its Production Level, the Manager of a Firm