Question

Which of the following demand elasticities with respect to price is possible, then one goods-producing monopoly companies maximize their profits in their market?

a) -0.5

b) -0.8

c) -1

d) -2

Answer 1

Ans.

The distinguishing characteristics of monopoly are that a single firm represents the market and significant barriers to entry exist.

As in the market structures of monopolistic competition and oligopoly, the monopolist does not have a well- defined supply function that determines the optimal output level and the price to charge. The optimal output is the profit- maximizing output level. The profit- maximizing level of output occurs where marginal revenue equals marginal cost, MR = MC.

This must be so because marginal revenue and marginal cost will always intersect where marginal revenue is positive. This fact implies that quantity demanded responds more than proportionately to prices changes, i.e. demand is elastic, at the point at which MC = MR

Correct answer is option a) -0.5