The total demand for good Q is Made up by two markets demand. Market A displays a price elasticity of -2 whereas market B -4. The firm presents a cost function of the form : 120 + 4Q. Find the price charged by the firm in the two markets and the quantities supplied
To find the price charged by the firm in the two markets and the quantities supplied, we should use markup rule. A markup rule refers to the pricing practice of a producer with market power, where a firm charges a fixed mark up over its marginal cost.
P = Ed*MC/(1 + Ed) MC = TC' = (120 + 4Q)' = 4 So, price in market A equals PA = -2*4/(1-2) = $8 PB = -4*4/(1-4) = 16/3 = $5.33
According to the rule of profit maximization:
P'(Q)*Q + P - TC' = 0 P'(Q) = Ed, TC' = MC = 4, so: