Question

A monopoly produces X at a marginal cost of $10 per unit and charges a price of $20 per unit. Determine the elasticity of demand at the profit-maximizing price of $20.

Answer 1

Answer:

-2

Explanation:

To solve this question we can use Lerner's equation or Lerner's index which gives the relationship between elasticity of demand and profit maximizing cost and marginal cost:

$Lerner's\, Index=\frac{P-Mg\,Cost}{P}=\frac{1}{|\eta_d|}$

Replacing $\frac{20-10}{20}=\frac{10}{20}=\frac{1}{2}$

Then we get that the elasticity of demand is $\eta_d=-2$