The markup of price over marginal cost for a monopolist is _____.
A)independent of the price elasticity of demand
B)inversely related to the price elasticity of demand
C)the same as the price elasticity of demand
D)the same as the price elasticity of supply

Question

Quizplus · Accepted Answer

The markup of price over marginal cost for a monopolist is inversely related to the price elasticity of demand. In other words, when demand is more elastic (i.e. consumers are more price sensitive), the markup will be lower. This is because if the monopolist tries to charge a high price, they will lose a lot of customers to substitutes, whereas if they charge a lower price, they can capture a larger share of the market. On the other hand, if demand is less elastic (i.e. consumers are less price sensitive), the monopolist can charge a higher price without losing too many customers. Thus, the markup will be higher.

The Markup of Price Over Marginal Cost for a Monopolist