Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Chapter 15, Problem 15.10P
Inverse elasticity rule
Use the first-order condition (Equation 15.2 ) for a Cournot firm to show that the usual inverse elasticity rule from Chapter 11 holds under Cournot competition (where the elasticity is associated with an individual firm's residual demand, the demand left after all rivals sell their output on the market). Manipulate Equation 15.2 in a different way to obtain an equivalent version of the inverse elasticity rule:
where
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ou are the owner of a local Honda dealership. Unlike other dealerships in the area, you take pride in your “No Haggle” sales policy. Last year, your dealership earned record profits of $1.2 million. In your market, you compete against two other dealers, and the market-level price elasticity of demand for midsized Honda automobiles is -1.4. In each of the last five years, your dealership has sold more midsized automobiles than any other Honda dealership in the nation. This entitled your dealership to an additional 25 percent off the manufacturer’s suggested retail price (MSRP) in each year. Taking this into account, your marginal cost of a midsized automobile is $13,000.What price should you charge for a midsized automobile if you expect to maintain your record sales?Instruction: Enter your response rounded to two decimal places.
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