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    price-cost markup

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    A. What price-cost markup is implied by a firm' elasticity of demand equal to

    B. A "loss leader" is often defined as a product which is sold below incremental cost in order to build traffic to a store (whether physical or online). How would you reconcile the use of loss leaders with the markup rule you used in part A.?

    C. How is the use of a loss leader like investing in reputation?

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    A) Mark up is the amount of profit added on to the cost of a product or service to give selling price. A mark up is usually expressed as a percentage. The relation between the mark up & the elasticity of demand is given by the following equation.

    MU = - 1/ (1+e)

    Where, MU - refers to the mark up
    e - refers to the elasticity of demand.
    When the elasticity of demand is -3, then the mark up can be calculated as,
    MU = - 1/ (1-3)
    = -1/-2
    = 0.5 or 50%
    Thus the mark up is equal to 50%, which implies that, higher the elasticity, lower the mark up.

    B) ...

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