price-cost markup
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A. What price-cost markup is implied by a firm' elasticity of demand equal to
-3.0?
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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Microeconomics-answers:
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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