Answer:
Step-by-step explanation:
By how much does the residual elasticity of demand facing a firm increase, as the number of firms in the market increases by one?
The residual elasticity of demand facing a firm, is the portion of market demand which is not met or supplied by other firms in the market. In other words, this is the demand curve of the firm, given the presence of other firms in the market.
Given that
- all the firms in this market sell identical products,
- have identical marginal costs,
- and produce the same amount of output;
We model the residual elasticity of demand for this firm as:
EDr = EDm - EDa
Where:
EDr = the residual elasticity of demand for this firm
EDm = market elasticity of demand
EDa = total elasticity of demand facing ALL other firms in the market.
If EDa = 4, and a new firm enters the market, it will become 5
Elasticity of demand is the degree of responsiveness of demand, to change in price of a commodity.