If the profit-maximizing markup factor in a three-firm Cournot oligopoly is 2,what is the corresponding market elasticity of demand?
A) −1/2
B) −2/3
C) −1.0
D) −2.0

Question

Quizplus · Accepted Answer

The profit-maximizing markup factor (M) in a three-firm Cournot oligopoly can be calculated as:
M = (1/3) * (1/(1+E))
Where E is the market elasticity of demand. 
If M = 2, then we can plug it in the above equation and solve for E:
2 = (1/3) * (1/(1+E))
1 + E = 1/6
E = -5/6
Therefore, the corresponding market elasticity of demand is -2/3, which is option B.

If the Profit-Maximizing Markup Factor in a Three-Firm Cournot Oligopoly