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QUESTION
Four firms have roughly equal shares of the market for farm-raised catfish. The price elasticity of demand for the market as a whole is estimated at...
4. Four firms have roughly equal shares of the market for farm-raised catfish. The price elasticity of demand for the market as a whole is estimated at 1.5.
- a. If all firms raised their prices by 5 percent, by how much would total demand fall?
- b. What is the price elasticity if a single firm raises its price (with other firms' prices unchanged? Hint: Use the expression for elasticity in equation 3.8b, EP (dQ/dP)(P/Q), and note that the individual firm's output Q1 is only one-quarter as large as total output Q.
- c. Suppose that the quantity supplied by the four firms is forecast to increase by 9 percent. Assuming that the demand curve for catfish is not expected to change, what is your forecast for the change in market price (i.e., what percentage price drop will be needed to absorb the increased supply)?
