A profit-maximizing monopolist faces a downward-sloping demand curve that has a constant elasticity of -3. The firm finds it optimal to charge a price of $12 for its output. What is its marginal cost at this level of output?

Question

Quizplus · Accepted Answer

For a monopolist, the relationship between price (P), marginal cost (MC), and elasticity of demand (E) is given by the formula: P = MC * (E / (E + 1)). Given E = -3 and P = $12, solving for MC gives MC = $8.

A Profit-Maximizing Monopolist Faces a Downward-Sloping Demand Curve That Has