The Frank Failing Company has an average variable cost of $8,average fixed cost of $16,marginal cost of $12,and elasticity of demand -3.Frank should:

Question

Quizplus · Accepted Answer

Since the firm's marginal cost is $12 and the elasticity of demand is -3, the firm should set its price at a markup over marginal cost that is equal to the inverse of the absolute value of the elasticity of demand, which in this case is 1/3.

So, the firm should charge a price that is $4 above its marginal cost (1/3 * $12 = $4), giving a price of $12 + $4 = $16.

At this price, the firm is covering its variable costs ($8) and making some contribution to its fixed costs ($16-$8 = $8), meaning it is better off operating than shutting down.

The Frank Failing Company Has an Average Variable Cost of $8,average