Question

Would it be possible if someone please explain to me how to get the answer on question D? Thanks.

3. Banana Computer Company sells Banana computers both in the domestic and foreign markets. Because ofdifferences in the power supplies, a Banana purchased in one market cannot be used in the other market. The demandand marginal revenue curves associated with the two markets are as follows:

????= 20000 ? 20??,???? = 25000 ? 50??

?????? = 20000 ? 40??,?????? = 25000 ? 100??

Banana's production process exhibits constant returns to scale and it takes $1,000,000 to produce 100 computers.

D.(d)At the profit-maximizing price and quantity, what is the price elasticity of demand in the domestic market? Whatis the price elasticity of demand in the foreign market?-3 and -2.33.

Answer 1

Price and quantity in domestic market

20000 - 40Q = 10000

Q = 250 and price Pd = 15000.

Price and quantity in foriegn market

25000 - 100Q = 10000

Q = 150 and price Pf = 17500

Find original demand functions

Qd = 20000/20 - 1/20P or Q = 1000 - (1/20)Pd and similarly for foreign demand we have Qf = 500 - (1/50)Pf

Elasticity = slope of demand x P/Q

Domestic price elasticity of demand is

ed = -(1/20) * (15000/250) = -3

Foriegn price elasticity of demand is

ed = -(1/50) * (17500/150) = -2.33