ECON 625 Managerial Economics Problem Set 5 Questions 1 Thro

ECON 625 Managerial Economics Problem Set 5 questions 1 Through 5 Refe

Questions 1 through 5 refer to the following scenario. Suppose three firms face the same total market demand for their product. This demand is: Price (P) Quantity (Q) $,,,,000 Suppose further that all three firms are selling their product for $60 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 $50. 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 $70 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 $70, lowering to $50, or making no change? Raising to $70 Lowering to $50 Making no change (keeping price at $)

Paper For Above instruction

Understanding the dynamics of firm behavior in various market structures is fundamental to managerial economics. The first five questions explore the impact of pricing strategies among firms operating in a competitive environment, specifically focusing on revenue implications when firms alter their prices.

In the initial scenario, three firms face a homogeneous demand where each firm charges $60 and captures approximately one-third of the total market share. Given the demand distribution, the total revenue per firm can be calculated by multiplying the firm's price by its quantity sold. Since all firms are selling at the same price and share, the total market demand at this price must be inferred, but the problem provides an incomplete demand function as "$,,,,000," which appears to be an error or placeholder. For analytical purposes, assume the total market demand at $60 is known or we interpret the demand as Q = 10,000 units at \$60, resulting in each firm's revenue as 1/3 of the total market (i.e., approximately 3,333 units), leading to a revenue of about $200,000 per firm (since 3,333 units × $60 = $200,000).

Next, when one firm drops its price to $50 to gain market share, and the other two follow, this triggers a price war. The quantities sold by each firm at these new prices are affected, typically increasing overall market demand but decreasing the revenue for each firm due to the lower price point. To evaluate the new revenues, one must consider the demand elasticity and the resulting quantities sold at the new prices. Rounded to the nearest dollar, the total revenue can be approximated based on the new quantities sold at \$50 per unit.

The impact of the price drop varies: the firm initiating the price cut might see an increase or decrease in revenue depending on the elasticity of demand, while the other firms could see revenues decreased due to lower prices unless market share gains offset this. Generally, when prices fall, total revenue per firm tends to decrease unless quantity sold increases substantially.

If all firms instead raise their prices to $70, the resulting total revenues depend on the demand response. Higher prices typically lead to lower quantities sold, thus reducing total revenue, unless demand is relatively inelastic. Calculations should be performed assuming the demand at \$70 is known, and revenues for each firm are derived by multiplying the quantity sold at \$70 by the new price.

Finally, the firms' strategic choices—raising prices to \$70, lowering to \$50, or maintaining current prices—depend on revenue impacts, competitive considerations, and market elasticity. Generally, in a price war, firms might prefer to maintain or raise prices if demand is elastic, whereas aggressive price cuts may lead to lower revenues for all.

Subsequent questions (6-10) analyze a monopolistically competitive firm's optimal quantity and pricing based on demand and cost schedules, while questions 11-13 focus on market segmentation with differential pricing strategies and their profit implications. The last group (14-18) examines a duopoly's strategic interaction via game theory in a decision to open or close on Sundays, analyzing dominant strategies and equilibrium outcomes.

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