Question

You are the manager of happy avocados the dominant firm in the ready-made guacamole market. At your current production level, your marginal cost is $.60 and you have estimated that your price elasticity of demand is between 1.1 and 1.2. What range of prices should you charge to maximize your profit?

A. The range between $3.60 and $6.60
B. The range between $4.60 and $5.60
C. The range between $5.60 and $6.60
D. The range between $3.11 and $6.12

Answer 1

Given the marginal cost of $0.60 and a price elasticity of demand between 1.1 and 1.2, the firm should charge prices ranging from $5.22 to $6.59 to maximize profit, which is closest to the range of $5.60 to $6.60 as per the given options.

Step-by-step explanation:

To determine the range of prices to charge to maximize profit, we need to apply the concept of marginal revenue and price elasticity of demand. Since the marginal cost (MC) is $0.60, and we have a price elasticity of demand (PED) between 1.1 and 1.2, we can use the formula MR = MC / (1 + 1/PED) to find the markup factor. High price elasticity indicates the firm has some power to set prices above marginal cost without losing many sales.

To calculate the markup, use the midpoint of the elasticity range (1.15) and the given marginal cost of $0.60: MR = $0.60 / (1 - 1/1.15) = $0.60 / (1 - 0.870) = $0.60 / 0.130 = $4.62.

The firm should set a price that is $4.62 above marginal cost. Given that MC is $0.60, the optimal price range would be $0.60 + $4.62 = $5.22. Since we have a range of elasticity, the higher end of the price would be $0.60 / (1 - 1/1.10) = $0.60 / (1 - 0.909) = $0.60 / 0.091 = $6.59.

Therefore, the correct range of prices the firm should charge to maximize profit is between $5.22 and $6.59, which is closest to option C: $5.60 and $6.60.

Answer 2

To maximize profit, charge a price between $3.60 and $6.60 based on price elasticity of demand.

Step-by-step explanation:

To maximize your profit, you should charge a price within the range of $3.60 and $6.60. This is based on the estimated price elasticity of demand between 1.1 and 1.2. Price elasticity measures the responsiveness of demand to changes in price. With an elastic demand, a small change in price will result in a proportionally larger change in quantity demanded, allowing for higher profits.To maximize your profit, you should charge a price within the range of $3.60 and $6.60. This is based on the estimated price elasticity of demand between 1.1 and 1.2. Price elasticity measures the responsiveness of demand to changes in price.