Based on the best available econometric estimates, the market elasticity of dema

Question

Based on the best available econometric estimates, the market elasticity of demand for your firm’s product is -1.5. The marginal cost of producing the product is constant at $275, while average total cost at current production levels is $350.

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.

$

Explanation / Answer

a) Pricing under monopoly will be

P = [e/(1+e)]*MC

P = (1.5/0.5)*(275) = 825

b) Pricing under oligopoly will be

P = [2e/(1+2e)]*MC

P = (3/2)*275 = 412.5

c)Pricing with 19 other firms under oligopoly will be

P = [20e/(1+20e)]*MC

P =(30/29)*275 = 284.48

*e is the elasticity of demand.

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