π! =1000βπΓπ
Assume the marginal cost of the only firm supplying this market as ππΆ = π/2.
a. Derive an expression of elasticity of demand in terms of Y. Show your work.
(a)
We are given:
and
Elasticity of demand
.
(1)
Iso profit curve
Slope is given as:
.
(2)
Expression for Mark up:
(3)
If Y goes up, elasticity and mark up will reduce. This is because there exists a negative relationship between them.
(4)
Elasticity and Mark up have a positive relationship. When elasticity is raised Mark up also raises.
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