Which of the following describes the relation between price elasticity of demand and a monopolist's marginal revenue?

Question

Quizplus · Accepted Answer

The correct formula for a monopolist's marginal revenue is $M R = P \left( 1 + \frac { 1 } { \varepsilon _ { Q , P } } \right)$. This is derived from the monopolist’s MR equation, which is $M R = P + \frac { \Delta R } { \Delta Q }$. The monopolist faces a downward sloping demand curve for its product, and the price elasticity of demand varies along the demand curve. At higher prices, demand tends to be more elastic, whereas at lower prices demand tends to be more inelastic. Thus, the price elasticity of demand affects the monopolist's ability to increase its revenue. The formula for marginal revenue takes into account the monopolist's ability to raise the price of the product without losing all of its customers, and the greater the price elasticity of demand, the less the monopolist can raise the price. Therefore, choice D is the correct formula for the relation between price elasticity of demand and a monopolist's marginal revenue. The correct formula for a monopolist's marginal revenue is MR = P * (1 - 1/e), where e is the price elasticity of demand. Therefore, rearranging the formula gives MR = P * (1 + 1/e). Option D is the only choice that correctly represents this formula with the correct variables.

Which of the Following Describes the Relation Between Price Elasticity MR=P(1+εQ,p)M R = P \left( 1 + \varepsilon _ { Q , p } \right)MR=P(1+εQ,p​)

Which of the Following Describes the Relation Between Price Elasticity $M R = P \left( 1 + \varepsilon _ { Q , p } \right)$