Question

In: Economics

22. Suppose there are 25firms in the wiffleball market, in which the market demand elasticity is...

22. Suppose there are 25firms in the wiffleball market, in which the market demand elasticity is -.8. The elasticity of supply is 1. A single firm in this industry is thinking of raising its price. Calculate the residual demand elasticity facing a single firm.

23. The price elasticity of demand for umbrellasin Drytown is -4, and in Wettown the elasticity is -2. A single firm supplies the umbrellas in both towns. If the marginal cost per umbrella is $6.00, how much should the firm charge for umbrellas in Drytown and in Wettown?

SHOW WORK

Expert Solution

22. To calculate residual elasticity of a single firm, use the equation:

where is the number of firms

is the elasticity of demand

is the elasticity of supply

Substituting numbers in the equation:

= (25 * -0.8) - (25-1)*1

= -20 - 24

= -44

Hence, a typical firm faces the demand elasticity of -44.

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23. The price can be found out for both the towns using the following equation:

Where MC is the marginal cost

P is price

is demand elasticity

For Drytown:

Substituting numbers in the equation

Therefore, in Drytown a price of $8 per unit should be charged.

For Wettown:

Using the same formula and substituting values

Therefore, in Wettown $12 per unit should be charged.

Rahul Sunny answered 2 years ago

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