Answer to Question #240936 in Microeconomics for Kuds

Question

You are the owner of a car dealership and you practice “no haggle” sales policy. Last year, you made a record profit of GHC 1.5 million. Your dealership competes in a market with price elasticity of demand of -1.3. Your marginal cost is GHC 12000. How much should you charge to maintain your record profit? 

Answer 1

Solution:

Negative price elasticity of demand means that the products sold in the market are inferior, that is, their demand drops with the increase in income. It also means that the demand for the product is elastic, that is there is a substantial change in the quantity demanded when the price changes.

 

Therefore, in order to maintain your record profit, you should maintain the price you are charging, since any slight change might result in less revenue and hence less profits due to the fact that the demand is elastic and the product is inferior.