Question

Suppose the coronavirus pandemic escalates to the point that towns like Nacogdoches become completely cut off from other cities – no travel in or out is allowed and no shipments or deliveries. Fredonia Brewery is the only brewer of beer in town, and immediately becomes a monopoly producer. Suppose also that they hired you to estimate the demand elasticity for their product, and it turns out to be −0.5. Explain why this means that Fredonia Brewery cannot be maximizing profits.

Answer 1

It can be mentioned that a Monopoly always earns maximum profit in the elastic portion of the demand curve and this is because if the Monopoly increases the price, the quantity decreases and if the demand is inelastic the total revenue increases and with the decrease in quantity the marginal cost also decreases because marginal cost is an increasing curve as a result of which the profit level increases where more the inelastic demand more the scope of increasing price and getting profit and given that the elasticity of demand is -0.5 and that is the reason you have to understand it it is inelastic in nature and therefore it does not follow the rule that Monopoly always profit maximization the elastic portion of the demand curve and therefore it is not maximizing profits