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 off- peak load price to charge in the spring?
A)$500
B)$2,500
C)$900
D)$1,250

Question

Quizplus · Accepted Answer

To find the profit-maximizing off-peak load price, we need to use the formula: 
Price = Marginal Cost / (1 + 1/Price Elasticity of Demand)
For spring: 
Price = 500 / (1 + 1/2.25) = $900
Therefore, the best choice is C) $900 as it gives the highest profit-maximizing off-peak load price.

The Price Elasticity of Demand for a Rental Home in Luxury