Please help Why nobody answers me!! Help Markup on Cost. Radon Detectives, Inc.,
ID: 2496339 • Letter: P
Question
Please help
Why nobody answers me!! Help
Markup on Cost. Radon Detectives, Inc., offers radon testing to homeowners in the Vancouver area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result. Radon Detectives has been forced to reduce the average price for radon tests by 1%, but has enjoyed a 3% increase in demand Meanwhile, marginal costs have held steady at $30 per test. A. Calculate the point price elasticity for radon tests. B. Calculate Radon Detectives' optimal markup on cost. Wits optimal price.Explanation / Answer
(A) Price elasticity = % Change in quantity demanded / % Change in price
= 3% / - 1%
= - 3
(B) Lerner Index (LI) = - 1 / Price elasticity = - 1 / - 3 = 1 / 3
Again, LI = (Price - Marginal cost) / Price
So,
LI = (P - 30) / P = 1 / 3
3 x (P - 30) = P
3P - 90 = P
2P = 90
P = $45
Therefore, Mark-up on cost = (P - MC) / MC = $(45 - 30) / $30
= $15 / $30 = 0.5, or 50%