Firm A has price elasticity of demand of15 and a marginal co

Firm A has price elasticity of demand of-1.5 and a marginal cost of $30. Firm B has a price elasticity of demand of-2.0 and a marginal cost of $30. What is the profit-maximizing price of each firm?

Solution

A firm\'s profit maximising condition is characterised by equality between MR and MC .Thus the condition

MR =P(1 - 1/e) under profit maximisation becomes MC = P(1 - 1/e).Therefore firm A\'s profit maximising price

30 = P(1 - 1/1.5)

Solving we get P = 90 for firm A.

For firm B we have 30 = P(1 - 1/2)

P = 60 for firm B.Thus profit maximising price for firm A is 90 while that of firm B is 60.