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 $75, while average total cost at current production levels is $200. determine your optimal per unit price if: instruction: round your answers 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.

(a) $227

(b) $112

(c) $77.31

Explanation:

(a) Under a monopoly market conditions, the optimum level of production is at a point where marginal revenue is equal to the marginal cost.  

We know that MR = P(1 + 1/ed).

This implies MC = P(1 + 1/ed)

75 = P(1 - 1/1.5)

P = $227

Hence, the optimal per unit price in this case is $227.

b) In a cournot oligopoly, firm's elasticity of demand is the product of market elasticity and number of firms in the market.

For n = 2,

own price elasticity = -1.5 × 2

                                = -3

Use the same rule

MC = P(1 + 1/ed)

75 = P(1 - 1/3)

P = $112

Hence, the optimal per unit price in this case is $112.

c)  For n = 19, own price elasticity = -1.5 × 20

                                                       = -30.

Use the same rule

MC = P(1 + 1/ed)

75 = P(1 - 1/30)

P = $77.31

Hence, the optimal per unit price in this case is $77.31

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