Assume you have been hired to advise two different firms, A and B, regarding the

Question

Assume you have been hired to advise two different firms, A and B, regarding the price each firm should charge for its product, focusing on the amount each firm should mark up price over marginal cost. While both firms are price setters, the product produced by firm A is extremely unique and enjoys widespread appeal. In contrast, firm B sells a fairly standard product for which there are are several good, but not perfect, substitutes. How would your advice to each firm differ? How does the price elasticity of demand influence your recommendations?

Explanation / Answer

The profit-maximizing price-setting firm can stamp up cost over the minimal expenses of generation at the benefit augmenting level of yield. in line of this argument, firm A will be ready to apply a bigger markup variable than would firm B. This is on account of the ideal mark up is conversely identified with the price elasticity of demand . As demand at the cost setter's yield turns out to be more inelastic, the measure of the mark up expands. Taking into account the data in the inquiry, demand for firm A's yield is more inelastic than is demand for firm B's item. It then takes after that firm A ought to utilize a bigger markup, all else consistent.

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