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Based on the best available econometric estimates, the market elasticity of demand for your firm's product is -2
Based on the best available econometric estimates, the market elasticity of demand for your firm's product is -2. The marginal cost of producing the product is constant at $150, while average total cost at current production levels is $225.
Determine your optimal per unit price if:
Instructions: Enter your responses rounded to two decimal places.
a. You are a monopolist.
$ __________
b. You compete against one other firm in a Cournot oligopoly.
$ ____________
c. You compete against 19 other firms in a Cournot oligopoly.
$ __________
Expert Solution
Given,
The market elasticity of demand for your firm's product, Ed = -2
The marginal cost of producing the product, MC = $150
The average total cost, ATC = $225
a) Monopolist will always operate at
MC = P(1 + 1 /Ed); where P is the price
P = MC[ Ed / (1 + ed)]
P = 150*[(-2) / (1 + (-2))]
= 150*[(-2) / (-1)]
P = $300
b) The oligopolistic firm always use the following relation to set price
P = MC [NEd / ( 1 + NEd)]
Here, N = number of firms in the oligopoly
P = 150 [2(-2) / (1 + 2(-2))]
= 150 [(-4) / (-3)]
P = $200
c) When there are 19 other firms in the oligopoly then total number of firms = 20 in the industry
P = 150 [20(-2) / (1 + 20(-2))]
= 150 [(-40) / (-39)]
P = $153.85
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