Question

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

Answer 1

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.