Question

Suppose a firm plans to introduce a new product and believes the profit maximizing price is going to be $10 per unit. Then it learns its fixed costs of pricing the goods are going to be twice as high as it had originally thought. Some managers say that they must now raise price to $12 per unit to cover these additional fixed costs. If the original price of $10 per unit was the correct profit maximizing assuming the original level of fixed cost, should the firm raise its price? why or why not?

Answer 1

If the profit maximizing price is $10 and there is no change in the marginal cost of production, then the firm should not change its price. note that the profit maximizing price depends upon the elasticity of demand and the marginal cost. Changes in any of these variables will change the profit maximizing price. In the given case only fixed cost is changed but there is no change in marginal cost or elasticity. Hence profit-maximizing price will still be $10 per unit.