Consider a Cournot oligopoly consisting of five identical firms producing good X.If the firms produce good X at a marginal cost of $7 per unit and the market elasticity of demand is −3,determine the profit-maximizing price.
A) $7.50 per unit
B) $5.25 per unit
C) $7 per unit
D) $4.20 per unit

Question

Quizplus · Accepted Answer

In a Cournot oligopoly, firms choose quantities to produce, and the market price is determined by the total quantity produced. The profit-maximizing price in a Cournot oligopoly can be found using the formula P = MC / (1 + 1/(n*E)), where P is the price, MC is the marginal cost, n is the number of firms, and E is the elasticity of demand. Substituting the given values (MC = $7, n = 5, E = -3) into the formula gives P = 7 / (1 + 1/(5*(-3))) = 7 / (1 - 1/15) = 7 / (14/15) = $7.50.

Consider a Cournot Oligopoly Consisting of Five Identical Firms Producing