Suppose you are assessing Firm XYZ’s competitive strategy. The firm is not a per
ID: 1221223 • Letter: S
Question
Suppose you are assessing Firm XYZ’s competitive strategy. The firm is not a perfect competitor and so it has control over its pricing strategy. The firm has sunk costs of $3.4 billion. It has registered revenues of $300 million in the fiscal year. The current marginal cost is $1 per unit and the product is selling for $3 in the market. The current price elasticity of demand is -2. The firm is not yet registering profits. Now you are called in as the external analyst to provide advice to this firm. What advice would you give this firm so that it may move towards profit maximization?
Explanation / Answer
The demand for the product is price elastic and also at the current level of output sold price exceeds the Marginal Cost or the average cost of production which is equal to MC as MC is constant. So, the firm can increase its profit by selling more units of the output.
SO, firm should sell more units fro profit maximisation. This is also because the demand price elasticity is 2 which shows elastic demand for the product, thus price increase will lower Total revenue . So, to increase profits the firm should sell more quantity of output.