Your food-services company has been named as the monopoly provider of meals at a small university.The cost and demand schedules are:
TABLE 10-2
-Refer to Table 10-2,and suppose that the firm is a single-price monopolist.At the profit-maximizing level of output,the price elasticity of demand is

Question

Your food-services company has been named as the monopoly provider of meals at a small university.The cost and demand schedules are:
  TABLE 10-2
-Refer to Table 10-2,and suppose that the firm is a single-price monopolist.At the profit-maximizing level of output,the price elasticity of demand is

Quizplus · Accepted Answer

Profit-maximizing monopolists always produce at the quantity where marginal revenue equals marginal cost, which is Q=7 in this case. At Q=7, the price that monopolist charges is $16. The elasticity of demand at this price and quantity can be calculated as: 
(Change in quantity / midpoint of quantity) / (Change in price / midpoint of price)
= (1 / ((91-63)/2)) / (-2 / ((16-22)/2))
= 1.5
Since the elasticity of demand is greater than 1, this means that a 1% increase in price will result in a greater than 1% decrease in quantity demanded, indicating that demand is elastic at this price.

Your Food-Services Company Has Been Named as the Monopoly Provider