Consider an imperfect competition market with only three firms. The demand facing the kth firm in...

Consider an imperfect competition market with only three firms. The demand facing the kth firm in market (where k=1,2, and 3) is given below

Qk=S(1/3-B(Pk-P)

where Qk is the quantity demand facing the firm k, S is industry size, Pk is the price set by firm k, P is the average price in the industry, and B is a population parameter that could be estimated using sample evidence

A) Assuming that Pk=KP" (where P" is a constant and K=1,2, and 3) show that the demand facing the 2nd firm does not depend on the parameter B

B) Relax the assumption in part a and derive the algebraic relationship for the elasticity of demand facing the 1st firm with respect to its own prices.

*Elasticity of interest is defined as Eq1p1=%Q1 / % Change in P1

Expert Solution

Rahul Sunny answered 2 years ago

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