Suppose a Firm Faces the Demand Curve

question 148

Essay

Suppose a firm faces the demand curve
, which gives a constant price elasticity of demand of -2. To answer the next two questions, it will be helpful to recall the Lerner index.
a. If the firm's marginal cost is constant at $2, what are the profit-maximizing price and quantity?
b. If the firm's marginal cost increases to a constant $3, what are the profit-maximizing price and quantity?

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