Tracey Biogenetics, Inc purchases anti-snoring devices from a manufacturer in China and distributes them to retail stores throughout the United States. Tracey's management has estimated that within the range of feasible prices for the devices, the elasticity of demand of the retail stores is -2.0. If Tracey can obtain any quantity of devices from the manufacturer for a fixed price of $8, what price should it charge for its anti-snoring devices?
A) $6.00
B) $16.00
C) $26.00
D) $36.00
E) $46.00

Question

Quizplus · Accepted Answer

Given the elasticity of demand is -2.0, the optimal pricing strategy is to mark up the price by 50% over the marginal cost (which is $8 in this case). Therefore, the price should be $8 + ($8 * 0.5) = $12. However, there's no $12 option, suggesting a misunderstanding in the application of the formula for optimal pricing with elasticity. The correct approach involves understanding that with an elasticity of -2, the formula for optimal price is P = MC / (1 + (1/E)), where MC is the marginal cost and E is the elasticity of demand. Substituting the given values, P = $8 / (1 + 1/(-2)) = $8 / (1 - 0.5) = $8 / 0.5 = $16. Hence, the correct price is $16.

Tracey Biogenetics, Inc Purchases Anti-Snoring Devices from a Manufacturer in China