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[Solution] Demand Ela sticity and Profit Maximization Maui Macadamia Inc is the sole producer of macadamia nuts. The demand curve for macadamia nuts is

Question: Demand Ela sticity and Profit Maximization

Maui Macadamia Inc is the sole producer of macadamia nuts. The demand curve for macadamia nuts is linear and downward slopping and Macadamia’s marginal cost is increasing with output. Currently Macadamia sells its product at a price of $2 per unit. Consider the following three statements:

  1. If, at the current level of output, Macadamia’s marginal cost is $1 and the demand elasticity is –3, then Macadamia is not maximizing its profit.
  2. If, at the current level of output, Macadamia’s marginal cost is lower than marginal revenue, then the profit maximizing price is lower than $2.
  3. If, at the current level of output, marginal revenue is less than zero, then the profit maximizing price is higher than $2.

With respect to the statements above, which of the following is true:

  1. Only statement (i) is true.
    b. Only statement (ii) is true.
    c. Statement (iii) is false.
    d. All the three statements above are true.
    e. None of the three statements above is true.
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