Profit+maximizing+markup+for+monopoly+and+monopolistic+competition+and++Cournot

=Profit-Maximizing Markup=

Monopoly and Monopolistic Competition
The profit-maximizing markup for a monopolistic firm or a firm in monopolistic competition is:

P = [Ef / (1 + Ef)] * MC

where Ef = Own-price elasticity of demand for the firm's product MC = Firm's marginal cost

Cournot Oligopoly
In a Cournot oligopoly, a firm's own-price elasticity of demand is

Ef = NEm

where Ef = Firm's own-price elasticity of demand N = Number of firms in the market Em = Market elasticity of demand

Substituting into the formula for monopoly and monopolistic competition we arrive at:

P = [NEm / (1 + NEm)] * MC

Notice that if N goes to one and the Cournot oligopoly becomes a monopoly we see the formula becomes the same as given earlier for a monopoly.

=Questions=

1. Suppose a monopolistic firm is producing a product whose marginal cost of production is $20 and elasticity of demand is 1.5. What should the price be? (A) $6 (B) $12 (C) $6.50 (D) $12.50

2. Suppose a firm in a Cournot oligopoly with 4 companies is producing a product whose marginal cost of production is $50 and the market elasticity of demand is 2. What should the price be? (A) $37.44 (B) $42.00 (C) $44.44 (D) $52.50

=Answers=

//#1 Answer: B Using the formula and substituting:// P = [Ef / (1 + Ef)] * MC P = [1.5 / (1 + 1.5)] * $20 P = 0.6 * $20
 * P = $12**

//#2 Answer: C Using the formula and substituting:// P = [NEm / (1 + NEm)] * MC P = [8 / (1 + 8)] * $50 P = 0.88889 * $50
 * P = $44.44**