Question

Two firms control an industry and engage in Cournot competition. The price elasticity of demand is -2.50. If one of the firms has a constant marginal cost of $705.00 per unit and controls 75.00 percent of the industry, what is the equilibrium price? (Round to two decimals if necessary.)

Answer 1

From Lerner's Index we know :-

Given,

MC = $705

Market Elasticity of Demand = -2.50

Share of firm = 75% = 0.75

So we can calculate Elasticity for the firm as per it's market share :-

So, E = Market Elasticity ÷ Market power

E = -2.50 ÷ 0.75

E = -10/3

Now, Using the formula :-

Hence,

Equilibrium price is $1007.14