A monopolist produces at a point where the price elasticity of demand is -0.7 and the marginal cost is $2.If you were hired to advise this monopolist on how to increase his profits, you would find that the way to increase his profits is to
A)increase his output.
B)lower the price.
C)decrease his output.
D)produce the output level where marginal cost equals price.
E)increase his advertising efforts.

Question

Quizplus · Accepted Answer

The monopolist should decrease output because the price elasticity of demand is inelastic (-0.7), meaning that reducing output will increase total revenue and profits, as consumers are not very responsive to price changes.

A Monopolist Produces at a Point Where the Price Elasticity