You are the manager of Frozen Super Paws Treats, the dominant firm in market for frozen ice cream treats for dogs. At your current production level, your marginal cost is $1.40 and you have estimated that your price elasticity of demand is 1.8. What price should you charge to maximize your profit?

Question

Quizplus · Accepted Answer

To maximize profit, a firm should set its price where marginal revenue equals marginal cost.

We know that:
Marginal Cost (MC) = $1.40

To find the optimal price, we need to calculate the Marginal Revenue (MR) and set it equal to MC. To do this, we can use the following formula:
Price Elasticity of Demand (PED) = % change in Quantity Demanded / % change in Price

We can rearrange this formula to solve for MR:
MR/MC = 1 + 1/PED

Now we can plug in the values we have:
1 + 1/1.8 = 1.5556

So, MR/MC = 1.5556

Since MC = $1.40, we can find MR by multiplying $1.40 by 1.5556:
MR = $2.18

Therefore, to maximize profit, Frozen Super Paws Treats should charge a price of $2.18. However, this price point may not be realistic or feasible. To find the closest price point, we can round up to the nearest dime, which gives us a price of $2.20.

However, the answer choices do not include $2.20, so we need to choose the closest option to it. The option that is closest is B) $3.15. This price gives us a markup of $0.95 ($3.15 - $2.20) over our marginal cost of $1.40, which should allow us to earn a profit.

You Are the Manager of Frozen Super Paws Treats, the Dominant