Question

Based on the best available econometric estimates, the market elasticity of demand for your firm’s product is -2. The marginal cost of producing the product is constant at $200, while average total cost at current production levels is $260.

Determine your optimal per unit price if:

Instruction: Enter your responses rounded to two decimal places.

a. You are a monopolist.

$  


b. You compete against one other firm in a Cournot oligopoly.

$  


c. You compete against 19 other firms in a Cournot oligopoly.

$

Answer 1

Solution:-

(a). Note that we have the following relation between price and marginal cost for a monopolist as:-

P = MC (E / E + 1)
= 200 (-2 / -2 +1)
= 200(2)
= $400

(b). When you complete against one other firm in a Cournot oligopoly, the formula changes to:-

P = MC (NE / NE + 1)
= 200 (-2 * 2 / -2 * 2 + 1)
= 200 (-4 / -3)
= 267

(c). Now there are 19 other firms sp there are 20 firms in total:-
P = MC (NE / NE + 1)
= 200 (-2 * 20 / -2 * 20 + 1)
= 200 (-40 / -39)
= 205.13