Answer to Question #67902 in Economics for gizem

Question

Alice and Bob are the only producers of Drink Me™, a magic potion
that makes the drinker to shrink in size. Market research in Wonderland
indicates that the elasticity of demand for Drink Me™ is 1.25 at
all points along the demand curve. The marginal costs of production
are 3$ for both Alice and Bob and each producer serves 50% of the
market. What is the profit maximising price per dose of Drink Me™
if Alice and Bob compete a la Cournot? Do you have to revise your
answer if Alice and Bob compete a la Bertrand?

Answer 1

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