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Profit Maximization
hard

A company has fixed costs of $20,000 and sells a product for $200 per unit, with variable costs of $120 per unit. If the price elasticity of demand for this product is -1.5, what is the minimum number of units the company must sell to break even, assuming a 10% increase in price due to the elasticity factor?

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Learning Path

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Choose AnswerChoose the Best Answer

A

200 units

B

250 units

C

300 units

D

350 units

Understanding the Answer

Let's break down why this is correct

The price rises by 10%, so the new selling price is $220. Other options are incorrect because It assumes the elasticity factor has no effect, so it only considers the contribution margin; It assumes the elasticity causes a huge drop in sales that needs an even higher number.

Key Concepts

Break-even Analysis
Price Elasticity of Demand
Marginal Cost Analysis
Topic

Profit Maximization

Difficulty

hard level question

Cognitive Level

understand

Deep Dive: Profit Maximization

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Definition
Definition

Profit maximization involves firms optimizing their resource allocation to achieve the highest level of profit. This process includes comparing the marginal revenue product of labor and capital to their respective prices, aiming for both ratios to be equal to one for optimal resource utilization.

Topic Definition

Profit maximization involves firms optimizing their resource allocation to achieve the highest level of profit. This process includes comparing the marginal revenue product of labor and capital to their respective prices, aiming for both ratios to be equal to one for optimal resource utilization.

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