The manager of a convenience store competes in a monopolistically competitive market and buys cola from a supplier at a price of $1.25 per liter. The manager thinks that because there are several supermarkets nearby, the demand for cola sold at her store is slightly more elastic than the elasticity for the representative food store reported in Table (which is −3.8). Based on this information, she perceives that the elasticity of demand for cola sold by her store is −4. What price should the manager charge for a liter of cola to maximize profits? Market and Representative Firm Demand Elasticities and Corresponding RothschildIndexes for Selected U.S. IndustriesOwn Price Elasticityof Demand forOwn Price ElasticityRepresentativeFirm's ProductIndustryof Market DemandRothschlld IndexFood-1.0-3.80.26Tobacco-1.3-1.31.00Textiles-1.5-4.70.32Apparel-1.1-4.10.27Paper-1.5-1.70.88Printing and publishing-1.8-3.20.56Chemicals-1.5-1.51.00Petroleum-1.5-1.70.88Rubber-1.8-2.30.78Leather-1.2-2.30.52SOURCE: Matthew D. Shapiro, "Measuring Market Power in U.S. Industry," National Bureau of Economic Research, Working Paper No. 2212, 1987.

Given, Elasticity of demand for cola = -4 Here, the market price of $1.25 per liter can be taken as…

Answered: Market and Representative Firm Demand…

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The manager of a convenience store competes in a monopolistically competitive market and buys cola from a supplier at a price of $1.25 per liter. The manager thinks that because there are several supermarkets nearby, the demand for cola sold at her store is slightly more elastic than the elasticity for the representative food store reported in Table (which is −3.8). Based on this information, she perceives that the elasticity of demand for cola sold by her store is −4. What price should the manager charge for a liter of cola to maximize profits?

Market and Representative Firm Demand Elasticities and Corresponding Rothschild
Indexes for Selected U.S. Industries
Own Price Elasticity
of Demand for
Own Price Elasticity
Representative
Firm's Product
Industry
of Market Demand
Rothschlld Index
Food
-1.0
-3.8
0.26
Tobacco
-1.3
-1.3
1.00
Textiles
-1.5
-4.7
0.32
Apparel
-1.1
-4.1
0.27
Paper
-1.5
-1.7
0.88
Printing and publishing
-1.8
-3.2
0.56
Chemicals
-1.5
-1.5
1.00
Petroleum
-1.5
-1.7
0.88
Rubber
-1.8
-2.3
0.78
Leather
-1.2
-2.3
0.52
SOURCE: Matthew D. Shapiro, "Measuring Market Power in U.S. Industry," National Bureau of Economic Research, Working Paper No. 2212, 1987.

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