ECON2101 - Monopoly and own-price elasticity of demand...

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12/10/2011 1 Monopoly and own-price elasticity of demand curves. To understand why a monopoly always selects an output level for which market demand is own- price elastic, one first needs to understand how the own-price elasticity varies along a demand curve. (This is the purpose of the following slides) ... So in the case of a linear demand curve, only the upper part of the demand curve is price elastic. Point Own-Price Elasticity E.g. Suppose p i = a - bX i . Then X i = (a-p i )/b and X p i i i i i i p X dX dp * , * * . b 1 dp dX i * i Therefore, X p i i i i i i p a p b b p a p * , ( ) / .    1 Point Own-Price Elasticity p i X i * p i = a - bX i * X p i i i i p a p * ,   a a/b Point Own-Price Elasticity p i X i * p i = a - bX i * X p i i i i p a p * ,   p 0 0 0 a a/b Point Own-Price Elasticity p i X i * a p i = a - bX i * a/b X p i i i i p a p * ,   p a a a a     2 2 2 1 / / 0
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