Q2. Firms Assuming that labour is the only input to production, the real profits of an imperfectly competitive firm i can be expressed as follows: = ( ) ( ) which is simply real revenues minus real costs. Further assume that the demand function for firm i's good can be written as follows: = ( ) where is the price elasticity of demand faced by the firm (>1). Consider the following questions:

2 a) Derive an expression for the relative price (Pi/P) chosen by firm i. [Hint: firm i chooses Pi/P to maximise profits]. b) Provide an economic interpretation for your answer to part (a)