A monopoly producing a chip at a marginal cost of $6 per unit faces a demand elasticity of −2.5.Which price should it charge to optimize its profits?
A) $6 per unit
B) $8 per unit
C) $10 per unit
D) $12 per unit

Question

Quizplus · Accepted Answer

Given the demand elasticity (E) of -2.5 and the marginal cost (MC) of $6, the monopoly can optimize profits by setting the price (P) using the formula P = MC / (1 + 1/E). Substituting the given values, P = $6 / (1 + 1/(-2.5)) = $10.

A Monopoly Producing a Chip at a Marginal Cost of $6