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Assume that you are in charge of setting the price of lawnmowers at the department store...

Assume that you are in charge of setting the price of lawnmowers at the department store you manage. The cost of providing lawnmowers is given by TC = 800 + 70Q, and you estimate that the price elasticity of demand is -2.75. What price should you set in order to maximize profit?

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Answer #1

MC = d(TC)/dQ = 70

PE = - 2.75

Price = MR x e/(e - 1)

MR = MC at maximum profit level:

Price = 70 x 2.75/1.75 = 110

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