During the height of the pet rock craze in the 1970s, the price elasticity of demand was estimated to be 1.80.Since pet rocks have a marginal cost of zero, a profit-maximizing seller of pet rocks would
A)leave prices unchanged.
B)decrease prices.
C)increase prices.
D)need more-detailed market information before making any pricing changes.
E)diversify into selling Karen Carpenter LPs.

Question

Quizplus · Accepted Answer

With a price elasticity of demand greater than 1, reducing prices would increase total revenue, as the percentage increase in quantity demanded would be greater than the percentage decrease in price. Since pet rocks have a marginal cost of zero, increasing sales volume by lowering prices would maximize profits.

During the Height of the Pet Rock Craze in the 1970s