Question

Suppose that De Beers and the local water utility are both monopolists, in the markets for...

Suppose that De Beers and the local water utility are both monopolists, in the markets for diamond jewelry and water, respectively.

If both monopolies decide to raise prices by 15%, the monopoly that is most likely to see its total revenue decrease is ( A) De Beers or B) the local water utility) because it’s demand is A) unit elastic, B) less price elastic, or C) more price elastic.
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Answer #1

Ans:

  • De Beers
  • more price elastic.

Explanation:

Between the two goods i.e., diamond jewelry and water, demand for water is less price elastic because it is an essential good, where as demand for diamond jewelry is more price elastic because it is a luxury good. Thus, if a firm increases price of its good which has more price elastic demand, its total revenue will decreases. So,

If both monopolies decide to raise prices by 15%, the monopoly that is most likely to see its total revenue decrease is De Beers because it’s demand is more price elastic.

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