Question

Explain why profit-maximizing monopolist produces at the quantity that has the price elasticity of demand larger than unity. Illustrate your answer with a diagram.

Answer 1

A Monopolist having control on quantity and price can influence the market with its price. If the good becomes sufficiently available at lesser price, then people would not react much towards decrease in price which is the region where elasticity of demand would be less than 1 and monopolist can achieve maximum profit. So the monopolist would price at the region where the elasticity is greater than 1 and customers would react to any price changes which maximises it profit. The same is explained in the graph.