• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Oct 2012 Q5

S

Shreyansh Rela

Member
Profit maximizing monopolist with +ve mc and downward demand curve will be able to make most profit if demand is price elastic.
How?
We learned that price inelastic should be the demand to increase revenue hence profit. Also under monopoly demand is inelastic because of no close substitute.
But this says elastic.
 
Hi Shreyansh

The wording of this question is slightly ambiguous. I think the examiners intended candidates to state the elasticity of the demand curve at the current level of output. As you say, this is option B (price elastic). Given the ambiguity in the question wording, the examiners also gave credit for option A (price-inelastic).

How can we arrive at Option B (price elastic)? We are told that the firm is profit maximising. So, at that level of output MR = MC. Since MC is positive, MR must be positive. Then, if we assume that the demand curve for this monopolist is a straight line, the MR curve will be twice as steep. Recall that the elasticity varies along a straight line demand curve and in particular that demand is elastic in the top half of the curve (where MR is positive and output is less than the profit maximising level)

I hope that helps
Gresham
 
You must log in or register to reply here.
Back
Top