A monopolist faces an inverse demand curve and has a constant marginal cost of 20.The IEPR formula for this monopolist could be stated in the following way:

Question

A monopolist faces an inverse demand curve  and has a constant marginal cost of 20.The IEPR formula for this monopolist could be stated in the following way:

Quizplus · Accepted Answer

The IEPR (Inverse Elasticity Pricing Rule) formula is given by P = MC / (1 + 1/ε), where P is the price, MC is the marginal cost, and ε is the price elasticity of demand.

We are given the inverse demand curve as P = 110 - 7Q, which can be rewritten as Q = (110 - P)/7.

To find ε, we take the derivative of Q with respect to P and multiply by P/Q:
ε = - (dQ/dP) * (P/Q) = - 1/7 * (110-P)/(P/7) = (P-110)/P

Substituting this into the IEPR formula, we get: 
P = 20/(1 + 1/[(P-110)/P])
Simplifying this expression, we get: 
P = (2200/P - 109)/(21/P - 1)

The best choice is B, since it is the only option that matches this expression with the correct coefficients. In other words, B corresponds to the IEPR formula derived above.

A Monopolist Faces an Inverse Demand Curve and Has