The inverse elasticity pricing rule tells us the monopolist's optimal mark-up of price over marginal cost. In general,:

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The inverse elasticity pricing rule states that the optimal mark-up for a monopolist is equal to the inverse of the price elasticity of demand. Therefore, the less price elastic the demand (i.e. the smaller the absolute value of the elasticity), the larger the mark-up will be. Conversely, the more price elastic the demand (i.e. the larger the absolute value of the elasticity), the smaller the mark-up will be. Therefore, choice A is correct. Choices C and D are both incorrect, as marginal revenue and average revenue are not directly related to the optimal mark-up. The inverse elasticity pricing rule states that the optimal mark-up for a monopolist is equal to the inverse of the price elasticity of demand. Therefore, the more price elastic the demand, the smaller the mark-up will be. This is because if the monopolist raises prices too high, customers will switch to substitutes and the monopolist will lose too many sales. Therefore, the monopolist must set a lower mark-up in order to avoid losing too many customers.

The Inverse Elasticity Pricing Rule Tells Us the Monopolist's Optimal