Chapter 14, Problem 1E

To determine

To calculate: The profit maximizing price for every market.

Answer to Problem 1E

After necessary calculations, it can be seen that high elasticity of demand reduces the price of output, and hence domestic price is higher when compared to overseas price.

Explanation of Solution

Equilibrium price in domestic market is,

  $\begin{array}{l}\text{MR=MC}\\ \text{MR=P}\left(1+\frac{1}{E_d}\right)=MC\\ P\left(1+\frac{1}{-3}\right)=40\\ P\left(\frac{-2+1}{-2}\right)=40\\ P\left(\frac{1}{2}\right)=40\\ P=80\end{array}$

Equilibrium price in overseas market is

  $\begin{array}{l}\text{MR=MC}\\ \text{MR=P}\left(1+\frac{1}{E_d}\right)=MC\\ P\left(1+\frac{1}{-3}\right)=15\\ P\left(\frac{-3+1}{-3}\right)=15\\ P\left(\frac{2}{3}\right)=15\\ 2P=45\\ P=\frac{45}{2}\\ P=\$22.5\end{array}$

By observing the necessary calculations done above, it can be seen that due to the high elasticity of demand in the overseas market, the price is higher in domestic market when compared to the price in overseas market.

Economics Concept Introduction

Introduction: A tool that can be used to simplify and present all the possible outcomes that pop up from a strategic decision is called payoff matrix.