Suppose a monopolist has zero marginal cost.If he faces a market demand curve with constant price elasticity of -2, the profit maximizing output level approaches infinity.

Question

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Since the monopolist has zero marginal cost, producing any additional units will only increase revenue without increasing costs. Therefore, the monopolist will continue to produce units until the marginal revenue equals zero, which occurs at the point where the demand curve intersects the horizontal axis. Since the demand curve has a constant price elasticity of -2, it approaches infinity as quantity approaches zero. Therefore, the monopolist can keep producing more and more units without decreasing the price to zero, and the profit-maximizing output level approaches infinity.

Suppose a Monopolist Has Zero Marginal Cost