Question

A monopoly sells its good in the United​ States, where the elasticity of demand is −2​, and in​ Japan, where the elasticity of demand is −5.5. Its marginal cost is $7.

At what price does the monopoly sell its good in each country if resales are​ impossible?

The price in the United States is $_______.

The price in Japan is $_______.

​ (Round your answer to the nearest​ penny.)

Answer 1

Profit Maximizing Condition :

In order to maximize profit a firm charges that price and produces that quantity such that (P - MC)/P = -1/e where P = price, MC = Marginal Cost and e = elasticity of demand

For United States :

e = -2, MC = 7

Thus using above condition we get :

(P - 7)/P = -1/(-2)

=> P - 7 = 0.5P => P = 14

Hence, The price in the United States is $14

For Japan :

e = -5.5, MC = 7

Thus using above condition we get :

(P - 7)/P = -1/(-5.5)

=> P - 7 = P/5.5 => P = 8.56

Hence, The price in the Japan is $8.56