Answer to Question #318231 in Microeconomics for Anthony

Question

A firm’s market power can be measured by its ability to raise price above marginal cost. Relative to the level of marginal cost, this measure is (P –MC)/MC. How do you expect this to be related to the elasticity of demand for the monopolist’s output?

Answer 1

Monopolists have the power to set the prices they want but of course it is with limitation as it depends on consumers willingness and ability to purchase. The reason they set high prices is that considering they are the only providers , their elasticity of demand is inelastic compared to other products.