Question

Suppose a​ monopoly's price is ​$90.00 and its marginal cost of production is ​$18.00. What is the​ firm's markup? What is the firm's elasticity of demand?

Answer 1

Answer and Explanation:

The computation is shown below;

Given that

Price = P = $90

And, the Marginal cost = MC = $18

a.

Now the markup would be

= (P - MC) ÷ P

= ($90 - $18) ÷ $90

= $72 ÷ $90

= 0.80

= 80%

Now the monopoly markup is

b.

As we know that

Monopoly, markup = 1 ÷ elasticity of demand(e)

e = 1 ÷ markup

= 1 ÷ 0.8

= 1.25

The absolute value of e would always be negative so e = -1.25

Therefore

The​ firm s price elasticity of demand is -1.25