We write the percentage markup of price over marginal cost as

StartFraction Upper P minus MC Over Upper P EndFractionP−MCP.

For a profit-maximizing monopolist, how does this markup depend on the elasticity of demand? Why can this markup be viewed as a measure of monopoly power?

Market power is the ability to charge a price

1. equal to

2. 2. Below

3. 3. above

▼

marginal cost. For the profit-maximizing monopolist,

A.

StartFraction Upper P minus MC Over Upper P EndFraction equals negative Upper E Subscript Upper DP−MCP= −ED

will hold, implying that as the price elasticity of demand increases, market power decreases.

B.

StartFraction Upper P minus MC Over Upper P EndFraction equals negative StartFraction 1 Over Upper E Subscript Upper D EndFractionP−MCP=−1ED

will hold, implying that as the price elasticity of demand decreases, market power decreases.

C.

StartFraction Upper P minus MC Over Upper P EndFraction equals negative Upper E Subscript Upper DP−MCP= −ED

will hold, implying that as the price elasticity of demand decreases, market power decreases.

D.

StartFraction Upper P minus MC Over Upper P EndFraction equals negative StartFraction 1 Over Upper E Subscript Upper D EndFractionP−MCP=−1ED

will hold, implying that as the price elasticity of demand increases, market power decreases.

#### Top Answer

Markup pricing is a rule of thumb for charging prices over marginal cost, according to this concept... View the full answer