Sparkling Water Co. has determined that, for Michigan residents, the price elasticity of demand for a case of its purified water is -3.0, while the price elasticity of demand for Florida residents is -2.5. Assume that the marginal cost is constant at $8. What price per case should Sparkling Water Co. charge Michigan and Florida customers?
A) Customers in Michigan and Florida should be charged $16.
B) Michigan customers should be charged $11.94 and Florida customers charged $13.33.
C) Michigan customers should be charged $10 and Florida customers charged $14.
D) Customers in Michigan and Florida should be charged $13.33.

Question

Quizplus · Accepted Answer

The optimal price can be calculated using the formula P = MC / (1 + (1/E)), where P is the optimal price, MC is the marginal cost, and E is the price elasticity of demand. For Michigan, P = $8 / (1 + 1/(-3)) = $11.94. For Florida, P = $8 / (1 + 1/(-2.5)) = $13.33.