Question

The manager of a sporting goods store uses cost-plus pricing to determine the profit-maximizing price of bicycles. The cost of a bicycle to the store is $80. The manager estimates that the price elasticity of demand is –3.0. What is the profit-maximizing price?

Answer 1

firm is profit maximizing, then we know that MR=MC

$MR=P(1+\frac{1}{\epsilon})$

МС=МК=80

$80=P(1+\frac{1}{-3})$

P=120