A monopolist firm faces a demand with constant elasticity of - 2.8. It has a constant...

Question

Question

A monopolist firm faces a demand with constant elasticity of - 2.8. It has a constant marginal cost of $25 per unit and sets

Answer 1

Answer #1

First find the current market price using the rule P = MC *(ed)/(ed+1) or 25*(-2.8/-1.8) = 38.89

When marginal cost is increased by 15% to become 25*1.15 = 28.75, the new price will be 28.75*(-2.8/-1.8) = 44.72

The price has also increased by 15%.

The correct choice is option B.

Answer 2

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