A firm's marginal cost is equal to $8 for all levels of production. If the firm's price elasticity of demand is equal to -2.0, what price should be charged in order to maximize profit?
A) $16
B) $12
C) $8
D) $4

Question

Quizplus · Accepted Answer

To maximize profit, a firm should set its price according to the rule P = MC / (1 + 1/E), where P is the price, MC is the marginal cost, and E is the price elasticity of demand. Substituting the given values, P = $8 / (1 + 1/(-2)) = $8 / (1 - 1/2) = $8 / (1/2) = $16.

A Firm's Marginal Cost Is Equal to $8 for All