At the profit-maximizing quantity, the firm's marginal cost is $40 and it charges a price of $60. What is the price elasticity of demand at the profit-maximizing quantity?

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At the profit-maximizing quantity, a firm's marginal revenue (MR) equals its marginal cost (MC). Given that the firm charges a price above MC ($60 vs. $40), it indicates the firm has some market power and operates in a market that is not perfectly competitive, likely under monopolistic competition or monopoly. The Lerner Index, which measures the firm's price markup over marginal cost as a proportion of price, is given by (P - MC) / P. Here, it is (60 - 40) / 60 = 1/3. The Lerner Index is also inversely related to the price elasticity of demand by the formula: Lerner Index = -1 / (price elasticity of demand). Solving for the price elasticity of demand gives us -1 / (1/3) = -3, indicating that at the profit-maximizing quantity, the price elasticity of demand is -3.

At the Profit-Maximizing Quantity, the Firm's Marginal Cost Is $40