A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10.Assuming profit maximization,the implicit demand elasticity is
A) -0.2.
B) -0.8.
C) -1.25.
D) -5.0.

Question

Quizplus · Accepted Answer

To determine the implicit demand elasticity, we need to use the formula:
E = (% change in quantity demanded) / (% change in price)

Since this is a monopoly, the demand curve and the marginal revenue curve are the same. At the profit-maximizing output level, MR = MC. Therefore, the price elasticity of demand can be determined from the following equation:

(Price - MC) / Price = -1 / Elasticity of Demand

Substituting the values, we get:

(50 - 10) / 50 = -1 / E

E = -1 / (-40/50) = 1.25

Therefore, the implicit demand elasticity is -1.25.

A Monopoly Sets a Price of $50 Per Unit for an Item