Question

You manage a company that competes in an industry that is comprised of four equal-sized firms that produce similar products. A recent industry report indicates that the market is fairly saturated, in that a 10 percent industry-wide price increase would lead to a 18 percent decline in units sold by all firms in the industry. Currently, Congress is considering legislation that would impose a tariff on a key input used by the industry. Your best estimate is that, if the legislation passes, your marginal cost will increase by two dollars.
Based on this information, what price increase would you recommend if the tariff legislation is passed by Congress?

Answer 1

Explanation:

It is given that in the market there are four equal-sized firms that produce similar products. The market is saturated such that 10% industry-wide price rise would lead to 18% decline in units sold by all firms in the industry. Going further, there is a proposed legislation that imposes a tariff on a key input used by the industry, which on realization would result in the increase in marginal cost by $2.

This means that the market elasticity of demand is:

[ FIND THE ATTACHMENT FOR SOLUTION]