Question

Two firms control an industry and engage in Cournot competition. The price elasticity of demand is...

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.)

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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

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