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Finding the Profit Maximizing Price

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Med Company has unit sales of 100,000 with a unit price of $5. The variable costs are $1. The fixed expenses are $350,000. The company's sale manager thinks that Med should lower the price. He thinks that for every 2% drop in price, there will be a 5% increase in sales.

What is the profit maximizing price?

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Solution Summary

The solution computes the profit maximizing price equating the marginal cost with marginal revenue.

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Profit maximizing price is the price at that point where MR = MC

Marginal cost = Marginal revenue.

The inverse elasticity rule is:
MR = P ...

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Radhika Lakshmi, MPhil
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  • MPhil, Madurai Kamaraj University
  • MCom, Annamalai University
  • IATA, International Air Transport Association
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