A monopolist maximizes profits where MC 20 and the elasticity of consumer demand is equal to 2....

Question:

A monopolist maximizes profits where MC = 20 and the elasticity of consumer demand is equal to -2. What price maximizes monopoly profits?

Elasticity and Price:

The elasticity of demand can depict how a firm can increase revenue by changing the price. If the elasticity is inelastic for the good the firm can increase revenue by hiking the price. if the demand is elastic, then the firm can increase revenue by lowering the price.

Answer and Explanation: 1

The formula to calculate the price is

{eq}P=\frac{MC}{1+\frac{1}{e}} {/eq}

P = price

MC = Marginal cost

e = Elasticity

{eq}P=\frac{20}{1+\frac{1}{-2}}=40 {/eq}

  • The profit-maximizing price is $40.

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