Think a price making firm (monopolist) with a downward-sloping demand curve is one with a price elasticity of demand equal to-1. This is illustrated in the following diagram. P=AR 20 X Expenditure stays the same as price changes
Think a price making firm (monopolist) with a downward-sloping demand curve is one with a price elasticity of demand equal to-1. This is illustrated in the following diagram. P=AR 20 X Expenditure stays the same as price changes
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:Question 4
Think a price making firm (monopolist) with a downward-sloping demand curve is one with a price elasticity
of demand equal to-1. This is illustrated in the following diagram.
P=AR
20
Expenditure stays the
same as price changes
TR
AR = =
Q
d (TR)
dQ
Slope = b/Q
40
100
Diagram 5 Unit elastic demand (Pe=-1)
MR =
As price and quantity change by the same proportion, total revenue is the same at each price (the TR curve is
horizontal). This gives the following TR, AR and MR equations:
TR=b
b
-D (AR)
Q
= 0
Q
As TR is constant at all outputs, so MR must equal zero. In diagram 5, what is the value of b in equation
TR=b?
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