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    profit-maximizing prices

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    Please help with the following problem.

    A monopolistically competitive firm finds that the elasticity of demand facing its brand is -1.5, while its rival faces an elasticity of -2 for its brand. Both firms have a marginal cost of $5 per unit.

    Using the pricing rule of thumb, determine the profit-maximizing prices both firms will charge. In addition, calculate the price-cost margin for each firm and indicate which has more pricing power and why.

    Note Rule of thumb pricing is P* = (Marginal Cost)/(1+(1/Ed))
    where Ed is the elasticity of demand. Thus pricing here is expressed as a markup over marginal cost.

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    Please refer to the attachment.

    Posting ID: 35787 Economics, Microeconomics Year 4 monopolistically: profit-maximizing prices
    Bid Credits: 8 Deadline: March 14, 2005, 11:26 am EST
    A monopolistically competitive firm finds that the elasticity of demand facing its brand is -1.5, while its rival faces an elasticity of -2 ...

    Solution Summary

    This job reiterates profit-maximizing prices. Step by step calculations are given.

    $2.19