An end-of-aisle price promotion changes the price elasticity of a good from - 2 to - 3. Suppose the normal price is $34, which equates marginal revenue with marginal cost at the initial elasticity of - 2. What should the promotional price be when the elasticity changes to - 3? (Hint: In other words, what price will equate marginal revenue and marginal cost?)

MC = $17

P = $25.5

Explanation:

We proceed as follows;

Firstly calculate MC when e = - 2, where MR = MC

(P-MC) / P = 1 / IeI

Here P = $34 and e = - 2

(34 - MC) / 34 = 1 / I-2I

(34 - MC) / 34 = 1 / 2

78-2MC = 34

2MC = 34

MC = 34/2

MC = 17

Now, as we have MC, we will calculate the new price when e = - 3

(P-MC) / P = 1 / IeI

(P - 17) / P = 1 / I-3I

(P - 17) / P = 1 / 3

3P - 51 = P

2P = 51

P = 51/2

P = 25.5