CMA Final · Strategic Cost Management · Pricing Decisions and Strategies
Aadhya Foods Ltd. faces demand where price elasticity is constant at -3. The marginal cost of its product is ₹90 per unit. Using the marginal revenue equals marginal cost rule, what is the profit-maximising price?
The profit-maximising price is ₹135. With elasticity of -3, marginal revenue equals two-thirds of price. Setting two-thirds of price equal to marginal cost of ₹90 gives price of ₹135, which equals marginal cost multiplied by 3/2.
- A₹120
- B₹135Correct
- C₹270
- D₹180
Explanation
MR = P(1 + 1/e) = P(1 - 1/3) = 2P/3. Set 2P/3 = 90, so P = ₹135. Using P = MC × 3/(3-1) is the same; the error of ₹120 comes from adding a 1/3 mark-up (90 × 4/3) instead of the correct 3/2 factor.
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