MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize profits?

Question

Quizplus · Accepted Answer

To maximize profits, MNO Limited should set prices where marginal revenue equals marginal cost. Marginal revenue is equal to the price charged multiplied by the elasticity of demand. Marginal cost for MNO Limited is $0.50 in both markets.

For the West Coast market, the price should be set where:

($1 + $2.50) / 2 = $1.75

The elasticity of demand on the West Coast (-1.50) is more elastic than the East Coast elasticity (-1.25), meaning that a price increase will lead to a larger decrease in demand. Therefore, the price on the West Coast should be lower than the price on the East Coast.

For the East Coast market, the price should be set where:

($1 + $2.50) / 2 = $1.75

Therefore, the optimal prices to maximize profits are $1.50 on the West Coast and $2.50 on the East Coast.

MNO Limited Publishes a Magazine Targeted at Urban Professionals Who