The price elasticity of demand for a rental home in Luxury Resorts in the summer is 1.40 and is 2.60 in the spring. If Luxury Resorts faces a constant marginal cost of $600 per home rental, what is the profit- maximizing off- peak load price to charge in the spring?
A)$2,100
B)$975
C)$850
D)$575

Question

Quizplus · Accepted Answer

We can use the formula for profit-maximizing price:

Price = Marginal Cost / (1 + 1/Elasticity)

For spring, Price = $600 / (1 + 1/2.6) = $975.38

Since we are asked for the closest rounded answer, the best choice is B) $975.

The Price Elasticity of Demand for a Rental Home in Luxury