1. (4 points) Suppose that economists at Left Twix determine that the price elas
ID: 1114267 • Letter: 1
Question
1. (4 points) Suppose that economists at Left Twix determine that the price elasticity of demand for the left twix bar is -2.0. If the marginal cost of producing left twix is equal to $1.00, what price should Left Twix charge to maximize profit? a. 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 S3.25. Assuming that Right Twix is maximizing profit, what is their price elasticity of demand?Explanation / Answer
We know that the relation between Price, MC and elasticity as follows.
MR=P*(1-1/e) or at profit max point MR=MC so
MC = P*(1-1/e)
a.
1 = P*(1-1/2)
1=0.5*P
P = 1/0.5
P = 1*2 = 2
b.
1.22 = 3.25*(1-1/e)
1.22/3.25 = 1-1/e
1/e = 1-1.22/3.25
1/e = 0.625
e = 1/0.625 = (-)1.6
c.
The reasons for higher marginal cost for right twix can be more chocolate being used per chocolate, layered costly cookie and a cascaded expensive caramel, all increases the variable costs, total costs and therefore the marginal costs
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