(4 points) Suppose that economists at Left Twix determine that the price elastic
ID: 1111439 • Letter: #
Question
(4 points) Suppose that economists at Left Twix determine that the price elasticity of demand for the left Twix bar is -2.0.
a. If the marginal cost of producing left Twix is equal to $1.00, what price should Left Twix charge to maximize profit?
b. 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?
Explanation / Answer
Lerner Index (LI) = - 1 / Price elasticity of demand (Ep) = (P - MC) / P Where P: Price, MC: Marginal cost
a)
LI = (- 1) / (- 2) = 1/2
So,
(P - 1) / P = 1/2
P = 2P - 2
P = $2
(b)
LI = $(3.25 - 1.22) / $3.25 = $2.03 / $3.25 = 0.62
Therefore,
0.62 = - 1 / Ep
Ep = - 1 / 0.62
Ep = - 1.60
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