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For a profit-maximizing monopoly where the marginal revenue is $10 and price is $20, the price...

For a profit-maximizing monopoly where the marginal revenue is $10 and price is $20, the price elasticity of demand is:?

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Answer #1

The following relation between marginal revenue and Price Elasticity of Demand is important because it links the Price Elasticity of Demand with the price that maximizes profit.

Marginal Revenue = Price ( 1 + 1 / Elasticity of Demand)

It can be written as

MR = P ( 1 + 1 / Ed)

Plugging Values in above formula, we get

10 = 20 ( 1 + 1 / Ed)

10 / 20 = 1 + 1 / Ed

0.5 = 1 + 1 / Ed

-1 / Ed = 1 - 0.5

-1 / Ed = 0.5

Ed = -1 / 0.5

Ed = -2

So, Price Elasticity of Demand for profit maximizing Monopoly is -2

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