Question

A monopolist faces demand with constant elasticity of -2. Marginal cost is $20. Find profit maximizing price for this monopolist.

Answer 1

In a monopolist scenario; MR =MC

To get price;

$P=MC/(1+1/E_d)$

Where E_d is elasticity of demand

$P=20/(1+1/-2)$

$P=20/(1+-0.5)$

$P=20/-0.5$

$P=40$

The price should be set at 40.