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Firm A is operating in an imperfectly competitive industry knowing: price elasticity of demand is...

Question:

Firm A is operating in an imperfectly competitive industry knowing: price elasticity of demand is -1.8.

Firm B is operating in an imperfectly competitive industry knowing: price elasticity of demand is -2.3.

a) Find the optimal price for each if MC = $25, $100, and $200

b) What can you conclude about the market power, thinking of the Lerner index, of each firm?

Why?

Optimal Pricing and Price Elasticity of Demand:

The price elasticity of demand for a good measures consumer response to a change in the price of the product, in particular, it reports the percentage change in quantity demanded given a percentage change in the price. Firms find optimal to increase the price of the good when consumers will not reduce their quantity demanded in a significant manner.

Answer and Explanation:

a)

  • Firm A, price elasticity of demand = -1.8

FA1) MC = $ 25, optimal price is $ 56.25

FA2) MC = $100, optimal price is $225.00

FA3) MC =...

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Price Elasticity of Demand: Definition, Formula & Example

from Intro to Business: Help and Review

Chapter 3 / Lesson 54
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