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3.You know from earlier in the course that if the firm has the linear demand equation...

3.You know from earlier in the course that if the firm has the linear demand equation P(q) = a –bq, then the price elasticity of demand at an output qis ε= (bq-a)/bq. Use this result to calculate the price elasticity of demand at the firm’s profit-maximizing point on the demand curve.

a. Based on your result in the last part, is the firm’s demand elastic or inelastic at the profit-maximizing point? Explain.

b.Using the price and marginal cost you found in 1(c) and 1(d), calculate the firm’s monopoly markup ratio (P –MC)/P. Is this equal to -1/ε, as we’d expect? Price= $6 MC=2

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