You are the manager of Happy Avocados, the dominant firm in the ready- made guacamole market. At your current production level, your marginal cost is $0.50 and you have estimated that your price elasticity of demand is 1.2. What price should you charge to maximize your profit?

Question

Quizplus · Accepted Answer

To maximize profit, a firm should set its price such that $MR = MC$. Given the price elasticity of demand ($E_d$) is 1.2, we can use the formula $MR = P(1 - \frac{1}{E_d})$. Setting $MR = MC$ and solving for $P$ when $MC = \$0.50$ and $E_d = 1.2$, we get $P = \$0.50 / (1 - \frac{1}{1.2}) = \$3$.

You Are the Manager of Happy Avocados, the Dominant Firm