What relationship exists between marginal revenue and the elasticity of demand? Use this relationship to explain how a monopoly can increase its profit if demand is inelastic.
What will be an ideal response?
The formula MR = P • (1 - 1/|n|) shows that marginal revenue is positive when demand is elastic (i.e., |n| > 1) and that marginal revenue is negative when demand is inelastic (i.e., |n|< 1). If demand is inelastic, then marginal revenue is negative and thus the last unit produced lowers the monopoly's total revenue. Moreover, marginal cost is positive, so the last unit produced also adds to the monopoly's total cost. By cutting back production, total revenue will rise and total cost will fall, increasing the monopoly's profit.
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A firm in monopolistic competition that introduces a new and differentiated product will temporarily have a ________ demand for its product and is able to charge ________
A) less elastic; a lower price than before B) less elastic; a higher price than before C) more elastic; a lower price than before D) more elastic; a higher price than before E) less elastic; the same price as before
When demand is perfectly elastic, marginal revenue is
A) zero. B) equal to price. C) declining. D) increasing.