Which expression below indicates the relationship between product price (P), marginal cost (MC), and the price elasticity of demand facing a firm (e_D, which is negative) when the firm is pricing in order to maximize profit?

Question

Quizplus · Accepted Answer

The expression P = MC [(e_D)/(e_D+ 1)] represents the relationship between product price, marginal cost, and price elasticity of demand facing a firm when the firm is pricing to maximize profit. This expression is derived from the profit-maximizing condition: MR = MC (where MR is the marginal revenue). With some algebraic manipulation, we can substitute price elasticity of demand for marginal revenue and derive the above expression.

Which Expression Below Indicates the Relationship Between Product Price (P)