Changes in variable costs and changes in the product's demand sensitivity to price are the two factors that affect the profit-maximizing price.

Question

Quizplus · Accepted Answer

Both changes in variable costs and changes in demand sensitivity can affect the profit-maximizing price. As variable costs increase, the profit-maximizing price will also increase in order to maintain profitability. On the other hand, if demand becomes more sensitive to price (i.e. a small change in price causes a larger change in demand), the profit-maximizing price will typically decrease in order to capture a larger share of the market.

Changes in Variable Costs and Changes in the Product's Demand