Bluhm Corporation's management believes that every 2% increase in the selling price of one of the company's products would lead to a 4% decrease in the product's total unit sales.The product's variable cost is $17.50 per unit. The product's profit-maximizing price according to the formula in the text is closest to:
A)$259.84
B)$33.99
C)$40.89
D)$31.81

Question

Quizplus · Accepted Answer

ε_d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.04))/ln(1 + (+0.02))= -2.06 Profit-maximizing markup on variable cost = -1/(1 + ε_d)= -1/(1 + (-2.06))= 0.94 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)× Variable cost per unit = (1 + 0.94)× $17.50 = $33.95 (the exact answer, without rounding error, is $33.99)

Bluhm Corporation's Management Believes That Every 2% Increase in the Selling