Suppose that at the competitive equilibrium,the elasticity of demand is 1.50.If the price under monopoly is 10 percent higher than under perfect competition,assuming identical cost curves,it can be concluded that the monopoly output is _____ percent below the competitive output.
A)67
B)1.5
C)15
D)0.67

Question

Quizplus · Accepted Answer

The formula for price elasticity of demand is given by:

Elasticity of demand = (% change in quantity demanded) / (% change in price)

Given that the elasticity of demand at the competitive equilibrium is 1.50, we can infer that a 10% increase in price would lead to a 15% decrease in quantity demanded under monopoly, assuming that the cost curves are identical. This is because the monopoly has the ability to set prices higher than the competitive level and restrict output to increase profits.

Therefore, the monopoly output is 15% below the competitive output, as per our calculations.

Hence, the correct answer is C) 15.

Suppose That at the Competitive Equilibrium,the Elasticity of Demand Is