Acme Baseball Bats is a monopoly firm.If the marginal cost of producing a baseball bat is $30,and the absolute value of price elasticity of demand for Acme Baseball Bat Company is estimated to be 4,at what price should Acme set its price if it wants to maximize profits?

Question

Quizplus · Accepted Answer

To maximize profits, a monopoly should set its price where marginal revenue (MR) equals marginal cost (MC). The relationship between price elasticity of demand (E) and marginal revenue is given by the formula MR = P(1 - 1/E), where P is the price. Given E = 4 and MC = $30, we solve for P when MR = MC. Rearranging the formula to solve for P gives P = MC / (1 - 1/E) = $30 / (1 - 1/4) = $30 / (3/4) = $40.

Acme Baseball Bats Is a Monopoly Firm