Answer to Question #196529 in Macroeconomics for esther amponsah

Question

1.     Explain why successful firms that employ markup pricing use fully allocated costs under normal conditions, but typically offer price discounts or accept lower margins during off-peak periods when excess capacity is available.

 

2.     Discuss how seasonal factors influence supply and demand, and why markups on fresh fruits and vegetable are at their highest during the peak of season.

Answer 1

1.The successful firms during peak hours employ marking pricing using fully allocated costs under normal conditions and offer discounts during peak hours. This is because, during peak hours, The capacity is fully utilized and the fixed costs are spread over number of quantities produced.

2.The markup on any product depends on the price elasticity or price sensitivity, During peak seasons of fruits and vegetables consumers tends to be less sensitive to price and more demanding for quality.

Optimal Markup on cost$=\dfrac{-1}{\epsilon_p+1}$

 Where,$\epsilon$ = price elasticity of demand.