When shortech introduced its quadrant mobile phone, it had few competitors and so it set a price of $500, while its unit (marginal) cost was $350. the economics consulting firm it hired to estimate the demand elasticity confirmed that this was indeed the optimal price at the time?

Question

Haiden Davis

Business

28 August, 09:45

When shortech introduced its quadrant mobile phone, it had few competitors and so it set a price of $500, while its unit (marginal) cost was $350. the economics consulting firm it hired to estimate the demand elasticity confirmed that this was indeed the optimal price at the time?

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Trace Keith · Answer 1

Answer: When shortech introduced its quadrant mobile phone, it had few competitors and so it set a price of $500 which was above its marginal cost of $350. But now with the increase in competition from other sellers, shortech will have to lower its price. When competition increase the best the firm can charge its customers is the competitive price given by P=MC. Thus, when MC is $300 shortech should charge a price equal to $300 for its mobile phone. If shortech does now lower its price then it will loose its market share and the competitors will take over.