At the profit-maximizing level of output,the amount by which the firm can mark up price is:
A)inversely related to the price elasticity of demand for item in question.
B)directly related to the price elasticity of demand for item in question.
C)totally unrelated to the price elasticity of demand for item in question.
D)equal to the ratio of the marginal and average costs of production.

Question

Quizplus · Accepted Answer

At the profit-maximizing level of output, the firm sets marginal cost equal to marginal revenue, which is also equal to the price. The amount by which the firm can mark up price depends on the price elasticity of demand. If demand is elastic (i.e., consumers are sensitive to price changes), the firm can't mark up price much without losing a lot of customers, whereas if demand is inelastic (i.e., consumers are not very sensitive to price changes), the firm can mark up price more without losing many customers. Thus, the firm can mark up price more when demand is inelastic and less when demand is elastic. Therefore, the correct answer is A.

At the Profit-Maximizing Level of Output,the Amount by Which the Firm