Short Answer (10 Points Total): Answer all of the followingork will not credit.

Question

Short Answer (10 Points Total): Answer all of the followingork will not credit. your work! Answers without the explanatory work will not be given full 1. (4 points) Suppose that economists at Left Twixs determine that the price elasticity of a. If the marginal cost of producing left twix is equal to $1.00, what price should demand for the left twix bar is -2.0. Left Twix charge to maximize profit? Suppose that Left Twix hires you to investigate Right Twix. Left Twix economists have estimated that Right Twix marginal cost is $1.22 with an average sale price of $3.25. Assuming that Right Twix is maximizing profit, what is their price elasticity of demand? b.

Explanation / Answer

Lerner Index (LI) = - 1 / Price elasticity of demand = (P - MC) / P

[P: Price, MC: Marginal cost]

(a)

LI = (- 1) / (- 2) = 1/2

So,

(P - 1) / P = 1/2

P = 2P - 2

P = $2

(b)

Lerner Index = $(3.25 - 1.22) / $3.25 = $2.03 / $3.25 = 0.62

Therefore,

0.62 = - 1 / Elasticity

Elasticity = - 1 / 0.62

Elasticity = - 1.60

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