The price elasticity of demand for a rental home in Luxury Resorts in the summer is 1.25 and is 2.25 in the spring. If Luxury Resorts faces a constant marginal cost of $500 per home rental, what is the profit- maximizing peak- load price to charge in the summer?
A)$2,500
B)$900
C)$5,000
D)$1,250

Question

Quizplus · Accepted Answer

The profit-maximizing price, $P$, can be found using the formula $P = MC \times \frac{E}{E - 1}$, where $MC$ is the marginal cost and $E$ is the price elasticity of demand. For the summer, with $E = 1.25$ and $MC = $500$, the calculation is $P = 500 \times \frac{1.25}{1.25 - 1} = 500 \times \frac{1.25}{0.25} = 500 \times 5 = $2,500$.

The Price Elasticity of Demand for a Rental Home in Luxury