Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Chapter 15, Problem 15.10P
Inverse elasticity rule
Use the first-order condition (Equation 15.2 ) for a Cournot firm to show that the usual inverse elasticity rule from Chapter 11 holds under Cournot competition (where the elasticity is associated with an individual firm's residual
where
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Suppose that econometricians at Hallmark Cards determine that the price elasticity of demand for greeting cards is -2. (a) If Hallmark's marginal cost of producing cards is constant and equal to $1.00, use the Lerner Index to determine what price Hallmark should charge to maximize profit. (b) Suppose that Hallmark Cards wishes to know the price elasticity of demand faced by its archrival, American Greetings. Hallmark hires you to estimate it. Hallmark provides you with an educated guess concerning the marginal cost of producing a greeting card, which they estimate to be constant and equal to $1.22. A quick trip to the store tells you that American Greetings is selling its cards for an average of $3.25. Using these numbers and assuming that American Greetings is maximizing profit, calculate the price elasticity of demand faced by American Greetings
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S&S Manufacturing Co. supplies automotive parts in three outlets in Selangor. The inverse demand equations faced by each outlet are as follows:
Outlet 1: P = 150 – 2.50 Q1
Outlet 2: P = 200 – 8.40 Q2
Outlet 3: P = 450 – 0.75 Q3
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c. If S&S Manufacturing Co. plans to increase the price by 10 percent, do you think the Company is making a right decision? Explain your answer.
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The price that you should set would range between $ and $. (Round your answers to two decimal places.)
If you refine your estimate of the marginal cost to $80, the price you should set would now range between $
and $ (Round your answers to two decimal places.)
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