If I am given a unit cost of $5, an elasticity of 1.5, and know there...

Question

Question

If I am given a unit cost of $5, an elasticity of 1.5, and know there are constant returns to scale, how do I calculate price?

Answer 1

Answer #1

Use the following rule

When constant returns to scale exist marginal cost and average cost are same. This implies that AC = MC

You are given that AC = 5 so MC = 5 is also true

PRICE = MC * (ELASTICITY)/(ELASTICITY + 1)

= 5*(-1.5/-0.5)

= $15

Therefore the price is $15.

Answer 2

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