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**

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