Suppose three firms face the same total market demand for their product. This de

Question

Suppose three firms face the same total market demand for their product. This demand is: Suppose further that all three firms are selling their product for dollar60 and each has about one-third of the total market. What is the amount of total revenue each firm receives, in dollars? Now assume that one of the firms, in an attempt to gain market share at the expense of the others, drops its price to dollar50. The other two quickly follow suit. What is the amount of total revenue each firm now receives, in dollars, rounded to the nearest dollar? What impact has the price drop had on the revenue of each firm? Each firm has less revenue. Each firm has more revenue. The price-dropper has more revenue and the others have less. The price-dropper has less revenue and the others have more. If the firms had all raised their prices to dollar70 instead of lowering price, what would be the amount of total revenue each firm would have received, in dollars, rounded to the nearest dollar? Would the firms have been better off raising the price to dollar70, lowering to dollar50, or making no change? Raising to dollar70 Lowering to dollar50 Making no change (keeping price at dollar60) Questions 6 through 10 refer to the scenario that follows. A monopolistically competitive firm has the following short-run inverse demand, marginal revenue, and cost schedules for a particular product. P = dollar45 - dollar0.2Q MR = dollar45 - dollar0.4Q TC = dollar500 + dollar5Q MC = dollar5

Explanation / Answer

1.

At price $60, total market demand is 30000 unit, equally (1/3) shared by all three firms in the market.

Thus,

Total revenue earned by each firm = Price*market share of the demand = 60*(1/3)*30000

Total revenue earned by each firm =$600000

2.

Now, price is dropped to $50 and at this price, market demand is 35000 units.

Now,

Total revenue by each firm = 50*(1/3)*35000 = 583333.33 or $583333 approx.

3.

Each firm has less revenue because, other two firms also followed the first firm and dropped their prices to $50.

4.

If the price is raised up to $70 then, market demand is 25000 units.

At this price,

Revenue earned by each firm = 70*(1/3)*25000 = $583333 approx.

5.

In this scenario also, revenue decreases from the price level of $60.

Thus, it will be better for the firm to make no change in price.

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