refer to the following scenario. Suppose three firms face the same total market
ID: 1189484 • Letter: R
Question
refer to the following scenario. Suppose three firms face the same total market demand for their product. This demand is:
Price (P)
Quantity (Q)
$80
20,000
70
25,000
60
30,000
50
35,000
Suppose further that all three firms are selling their product for $60 and each has about one-third of the total market.
What is the amount of total revenue each firm receives, in dollars?
Now assume that one of the firms, in an attempt to gain market share at the expense of the others, drops its price to $50. The other two quickly follow suit. What is the amount of total revenue each firm now receives, in dollars, rounded to the nearest dollar?
What impact has the price drop had on the revenue of each firm?
Each firm has less revenue.
Each firm has more revenue.
The price-dropper has more revenue and the others have less.
The price-dropper has less revenue and the others have more.
If the firms had all raised their prices to $70 instead of lowering price, what would be the amount of total revenue each firm would have received, in dollars, rounded to the nearest dollar?
Would the firms have been better off raising the price to $70, lowering to $50, or making no change?
Raising to $70
Lowering to $50
Making no change (keeping price at $60)
Price (P)
Quantity (Q)
$80
20,000
70
25,000
60
30,000
50
35,000
Explanation / Answer
At price $60, total market demand is 30,000 units.
As each firm as 1/3 market share, so each firm sold units will be 10,000.
Each firm revenues will be = 10,000*60= $600,000
Prices dropped to $50, market demand will increase to 35,000. Maintaing the same share 1/3,
each firm will sell = 35000*1/3 = 11,667
Each firm revenues at$50 = 11667*50= $583,333
Prices dropped to $70, market demand will increase to 25,000. Maintaing the same share 1/3,
each firm will sell = 25000*1/3 = 8333
Each firm revenues at$70 = 8333*70= $583,333
Making no change (keeing price @ 60) as it feches higher revenue of $600,000 per firm
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