Question

Draw and label a straight-line demand curve and indicate its elastic and inelastic portions. Clearly indicate the point where the curve is unit elastic. You may need to draw the monopolist's marginal revenue curve.

Answer 1

In the diagram the horizontal axis represents the output in units and the vertical axis represents the average and marginal revenue. The downward sloping curve touching both the axis is a straight line demand curve. The half way of the demand curve is the marginal revenue curve.

The marginal revenue curve becomes zero and from that point draw a vertical line that intersect the average revenue or demand curve. The point where it intersects the demand curve, the elasticity will be one(1). It otherwise means if the MR is zero, elasticity will be one. It rightly proves the formula

Elasticity = AR/AR-MR

It also means the vertical line that drawn from the zero of MR curve will intersect the AR curve at its middle point. Upper part fro that point is the portion of elasticity greater than one and the lower portion from that point is the portion of elasticity less than one. It is also shown in the diagram.

As per the geometric or point method elasticity equals to lower part of the demand curve divided by upper part. So at the middle point the elasticity will be one as the lower part equals to upper part. At the upper part elasticity is greater than one and at lower part elasticity is less than one.

The upper portion is elastic and the lower portion is inelastic.