Jaunita maintains the only green house in isolated Point Barrow, Alaska, and therefore has a monopoly on the sale of fresh flowers, Her hired-gun statistician estimates that the elasticity of demand for her flowers is -0.5. Is Juanita maximizing her profits? How do you know this? If Juanita could improve her profits, should she raise or lower the price?
Answer
Is Juanita maximizing her profits?
No
How do you know this?
A monopoly produces at MR=MC where an MC is a marginal cost and it is positive means the MR should be positive.
MR is positive up to the elasticity of demand is elastic and it is zero at unit elastic and negative at inelastic.
The given elasticity is inelastic so the MR is negative and the firm is producing above MR=MC level where MR<MC.
If Juanita could improve her profits, should she raise or lower the price?
She should reduce the production up to MR=MC as the production is higher than the profit-maximizing level.
Jaunita maintains the only green house in isolated Point Barrow, Alaska, and therefore has a monopoly...