7. Monopoly and Price Elasticity Consider the relationship between monopoly pricing and the price elasticity of demand. If demand is inelastic and a monopolist raises its price, total revenue would and total cost would Therefore, a monopolist wilI v produce a quantity at which the demand curve is inelastic. Use the purple segment (diamond symbols) to indicate the portion of the demand curve that is inelastic. (Hint: The answer is related to the marginal- revenue (MR) curve.) Then use the black point (plus symbol) to show the quantity and price that maximizes total revenue (TR). 10 Demand 9 8. Inelastic Demand 7 6. 4 Max TR 3 -1 -2 Marginal Revenue -3 -4 -5 1 2 3 4 6 8 9 10 Quantity
7. Monopoly and Price Elasticity Consider the relationship between monopoly pricing and the price elasticity of demand. If demand is inelastic and a monopolist raises its price, total revenue would and total cost would Therefore, a monopolist wilI v produce a quantity at which the demand curve is inelastic. Use the purple segment (diamond symbols) to indicate the portion of the demand curve that is inelastic. (Hint: The answer is related to the marginal- revenue (MR) curve.) Then use the black point (plus symbol) to show the quantity and price that maximizes total revenue (TR). 10 Demand 9 8. Inelastic Demand 7 6. 4 Max TR 3 -1 -2 Marginal Revenue -3 -4 -5 1 2 3 4 6 8 9 10 Quantity
Chapter1: Making Economics Decisions
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Transcribed Image Text:7. Monopoly and Price Elasticity
Consider the relationship between monopoly pricing and the price elasticity of demand.
If demand is inelastic and a monopolist raises its price, total revenue would
and total cost would
Therefore, a
monopolist will
produce a quantity at which the demand curve is inelastic.
Use the purple segment (diamond symbols) to indicate the portion of the demand curve that is inelastic. (Hint: The answer is related to the marginal-
revenue (MR) curve.) Then use the black point (plus symbol) to show the quantity and price that maximizes total revenue (TR).
10
Demand
9
8
Inelastic Demand
7
6
Max TR
3
2
1
-1
-2
Marginal Revenue
-3
-4
-5
2
3
4
6
7
8 9
10
Quantity
Expert Solution
Step 1
Answer:
A monopolist always produces in the elastic region of the demand curve. It is because in the inelastic region due to a decrease in price the marginal revenue becomes negative. A firm will not produce if it receives negative marginal revenue. So a monopolist firm always produces in the elastic region of the demand curve.
The upper half region of the demand curve is elastic and the lower half is inelastic. In the inelastic region, the MR is always negative.
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