Clulow Corporation recently changed the selling price of one of its products.Data concerning sales for comparable periods before and after the price change are presented below. The product's variable cost is $10.50 per unit. The product's profit-maximizing price according to the formula in the text is closest to:
A)$15.31
B)$16.67
C)$20.79
D)$13.86

Question

Clulow Corporation recently changed the selling price of one of its products.Data concerning sales for comparable periods before and after the price change are presented below.  The product's variable cost is $10.50 per unit. The product's profit-maximizing price according to the formula in the text is closest to:
A)$15.31 
B)$16.67 
C)$20.79 
D)$13.86

Quizplus · Accepted Answer

% change in price = ($31 - $34)/$34 = -8.82% % change in quantity sold = (10, 010 - 7, 800)/7, 800 = 28.33% ε_d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (+0.2083))/ln(1 + (-0.0882))= -2.70 Profit-maximizing markup on variable cost = -1/(1 + ε_d)= -1/(1 + (-2.70))= 0.59 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)× Variable cost per unit = (1 + 0.59)× $10.50 = $16.70 (the exact answer, without rounding error, is $16.67)

Clulow Corporation Recently Changed the Selling Price of One of Its