For a firm with market power, the profit- maximizing markup of price over marginal cost depends on the price elasticity of demand.

Question

Quizplus · Accepted Answer

The markup that maximizes profits for a firm with market power is dependent on the price elasticity of demand. If demand is relatively inelastic, the firm can charge a higher markup without losing many customers, while a more elastic demand means they can only charge a lower markup before losing too many customers to make up for the decrease in price.

For a Firm with Market Power, the Profit- Maximizing Markup