Question

A non-discriminating monopolist faces the following demand curve: Q=P-4 The marginal cost of producing an additional unit of output is 30 per unit. If the marginal cost of producing a unit of output doubles to 60, then the markup over marginal cost also doubles.

Answer 1

Elasticity of demand is -4, according to the production function

Price is found at P = MC * (ed)/(ed+1)

= 30*(-4/-3)

= 40

In this case the markup is (40 - 30)/40 = 0.25

When the marginal cost is $60 the price is 60*(-4/-3) = 80

In this case the markup is (80 - 60)/80 = 0.25

This is shows that markup over marginal cost remains unchanged. Hence the statement is false.