Question

A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming profit maximization by the monopoly and utility maximization by the agents, the price elasticity of demand measured at the quantity consumed by the agents is equal to:

Answer 1

-1.25

Step-by-step explanation:

Data provided in the question:

Price of a item per unit = $50

Marginal cost = $10

Now,

Price = ( 1 + Mark up) × Marginal cost

$50 = ( 1 + Mark up) × 10

$5 = 1 + Mark up

or

Mark up = 4

Also,

Mark up =
`\frac{1}{[\textup{-(elasticity of demand)} - 1]}`

or

4 =
`\frac{1}{[\textup{-(elasticity of demand)} - 1]}`

-(elasticity of demand) - 1 = 0.25

or

Elasticity of demand = -1.25