Question

How does elasticity affect the profit maximizing price point?

Answer 1

The profit maximizing price, P depends of elasticity and is given by:
`P=MC(varepsilon/(varepsilon+1))`

Explanation:

Price Elasticity theory maintains that long-term success and profitability depend upon ideal pricing, or producing a good to the point where the additional revenue of an extra unit of output equals the additional cost of producing that unit, i.e. MR=MC

Now `MR = (P+1/varepsilon)`
Where `P = "price", MR="Marginal Revenue", varepsilon = "elasticity"`

Now for profit maximizing company `MR = MC`
`MC="Marginal Cost"`

Thus `MR=MC=(P+1/varepsilon)` Solve for price
`P=MC(varepsilon/(varepsilon+1))`
The Above equation shows how the profit maximizing Price, P depends on elasticity.