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You manage two locations for your firm selling products to consumers
You manage two locations for your firm selling products to consumers. In city A, you have lots of competition, so the consumer's price elasticity is -7.5. In city B, you face less competition and your consumer's price elasticity is -3.5. The total cost of your location is the same and is given by 67Q + 30. What is the optional price in city B?
Expert Solution
The optimal price for a monopolist is a markup above the marginal cost, and the markup decreases with the price elasticity of demand. Specifically, the optimal price is given by:
- [Math Processing Error]P=MC(?1+?)
where [Math Processing Error]? is the price elasticity of demand.
In this question, the marginal cost is $67, the elasticity of demand is -3.5 for location B. Applying the formula, the optimal price in city B is:
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