At the profit-maximizing output the price of Tommy jeans is...

At the profit-maximizing output the price of Tommy jeans is twice as high as marginal cost. What is the elasticity of demand? (Hint: Solve $M R=P[1-(1 / \eta)]$ for $\eta$ and remember that $M C=M R$.)

Key Concepts

Price Elasticity of Demand

This concept measures how sensitive the quantity demanded of a good is to a change in its price. It is defined as the percentage change in quantity demanded divided by the percentage change in price. In monopolistic settings, the elasticity of demand plays a crucial role in determining the optimum price, as firms adjust prices based on how consumers respond to changes in price.

Marginal Revenue

Marginal revenue represents the additional revenue that a firm earns when it sells one more unit of its product. In a monopolistic market, marginal revenue is linked to the price and price elasticity of demand. The relationship is given by the formula MR = P[1 - (1/?)], which shows how the revenue from an extra unit is affected by the elasticity of the product’s demand.

Profit Maximization

Profit maximization is the goal where a firm chooses the level of output such that its marginal revenue equals its marginal cost. This condition ensures that the firm does not produce additional units at a cost that exceeds the revenue they generate. It is a cornerstone of economic theory that guides the pricing and output decisions of monopolistic and competitive firms alike.

Markup Pricing

Markup pricing refers to the strategy of setting the price above marginal cost, where the markup is determined by the elasticity of demand. In monopoly pricing, the optimal markup is derived from the relationship between price, marginal cost, and elasticity, illustrating that a less elastic (more inelastic) demand leads to a higher price relative to marginal cost.

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