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