24 When Ep3 the optimal markup on cost is a 100 bo 67 d 33 2

24. When Ep-3, the optimal markup on cost is:* a 100% b.o 67% d. 33% 25. When Ep -2, the optimal markup on price is: \'a#10090 b.67% d.q) 33%. Use the following table to answer the next question Total costo $50 85p 150 220 305 455 - Quantity of output 10- 20- 30 40e 50 26. If the market price is S8.50, what are the profit-maximizing output and profit? a.- output 40; profit- S35* 1b.q) Output 40, profit $0p \'ce output = 0; profit =-$50e d.o output and profit cannot be determined because marginal revenue cannot be calculated»

Solution

24.

C.

Working note:

E= -3

(P-MC)/P = -1/E ( as per the Lerner Index)

Let. Mark-up = X

Then,

((1+X)*MC – MC)/(1+X)MC = 1/3

X/(1+X) = 1/3

3X = 1+X

X = 1/2 = 50%

25.

A.

Working Note:

E = -2

(P-MC)/P = -1/E ( as per the Lerner Index)

Let. Mark-up = X

Then,

((1+X)*MC - MC)/(1+X)MC = 1/2

X/(1+X) = 1/2

2X = 1+X

X = 1 = 100%

26.

A

Working note:

At the output level of 40,

MC = (305-220)/(40-30) = $8.5

At this level, MC = price = MR, so it is a profit maximizing level of output.

When output level is 40,

Then,

Profit = revenue – cost = 40*8.5 - 305 = $35