Question
MCL produces a small toy drone. Based on historical data, demand at two different price levels is estimated as follows: When p = 10, demand
MCL produces a small toy drone. Based on historical data, demand at two different price levels is estimated as follows: When p = 10, demand is given by q = 35. When p = 11, demand is given by q = 28.
(a) Determine the value of price elasticity of demand.
(b) Suppose that unit cost of production is c = 2 (and is constant with output level). Assuming that the price elasticity of demand is constant, determine the profit-maximizing price.
(c) MCL is considering exporting to market M. Suppose that the transportation cost is negligible, so the cost of serving market M is the same as the cost of serving the domestic market. The price elasticity of demand in market M is estimated to be -3. Determine the profit-maximizing export price.
(d) Assuming that MCL sets the domestic price so as to maximize profits, determine the domestic market margin (in percentage terms).
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