Question

1. L&G's Lawn & Garden faces a demand curve of P=100-2Q and a marginal revenue for her product of 100-4Q.

a. what do you know about the elasticity of demand for this firm's output?

b. describe the industry structure and the nature of the firm's situation. Does it face competition? If so, what is the nature of that competition? Explain.

c. what is the profit maximization price and output for the firm which experiences constant marginal cost of $16? Why?

d. is there another market structure which would increase output and lower price? If so, what is the equilibrium price and quantity in the new market structure? Explain.

Answer 1

1. The demand function is P = 100 - 2Q and a marginal revenue MR = 100 - 4Q.

a. When MR = 0, that is at 100/4 = 25 units and at a price of 100 - 25*2 = $50, elasticity of demand is 1 and demand is unitary elastic. For prices greater than $50 or quantity less than 25, demand is elastic and elasticity is greater than 1. For prices less than $50 or quantity more than 25, demand is inelastic and elasticity is less than 1.

b. Since demand is downward sloping it is an imperfect industry structure which can take any form such as a monopoly, oligopoly or monopolistic competition. It appears that the firm must be facing some degree of competition. Though there is not enough information provided if it works in lawn and garden industry, there must be other players working.

c. MC = 16 and MR = 100 - 4Q. Using MR = MC we have 100 - 4Q = 16 or 4Q = (100 - 16). This gives Q = 84/4 = 21 units and price P = 100 - 2*21 = $42 per unit

d. If there is a competitive market, the price will fall down to the marginal cost which is $16 per unit. Output will then be increased to (100 - 16)/2 = 42 units.