Question

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7. If marginal cost is a positive constant above 0, what type of elasticity of demand does the firm face? What would be a value of elasticity we would not see for a profit- maximizing monopoly? 8. Explain why a monopolist has no supply curve. 9. Clothing stores often set the retail price of clothing at twice the cost of production. For example, a pair of jeans costs $7 to make, the jeans will retail for $14. What must the price elasticity of demand be for this practice to be profit maximizing?

Answer 1

7) In case the marginal cost is positive, price elasticity must be greater than 1. This is because elasticity is found using P/(P – MC). Now if P > MC and MC is positive, it implies that P/(P – MC) will be greater than 1. Hence, firm faces elastic demand when marginal cost is above 0. If the monopoly is profit-maximizing we would not see a value for price elasticity less than 1.

8) There is no supply curve for a monopoly because the supply decision of a monopoly does not entirely depend on the marginal cost but on the shape of demand curve and consequently the marginal revenue curve. A supply curve determines what to supply at what price. A price taker firm finds it convincing to supply whatever is demanded at a given price. But for a monopoly which is a price maker, price is established by the demand curve and so there is no unique supply curve for a given price.

9) Using P/(P – MC), the price elasticity is 14/(14 – 7) = 2.00. Hence price elasticity is 2.00 in absolute terms