Question
The Maguire Alarm Company is a medium-sized electronics company specializing in alarm devices. Maquire's demand function is estimated as Q = 4500 - P. The
The Maguire Alarm Company is a medium-sized electronics company specializing in alarm devices. Maquire's demand function is estimated as Q = 4500 - P. The company has the following cost function: TC = 150,000 + 400Q. Suppose that the current sales price is $2,000 per unit.
a. What is the current level of profits at this price?
b. What is the own-price elasticity at the current price of $2,000? Is demand elastic or inelastic at this price?
c. What is the optimal quantity and price (at which profits are maximized)? What is the level of profits at this optimal price? What is the own-price elasticity of demand at this optimal price? Is demand elastic or inelastic at this price?
d. What is the share of markup in the optimal price (Lerner Index)? Relate the Lerner index to the demand elasticity estimated in c.)
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