According to the Lerner Elasticity Rule, if the price elasticity of demand, in absolute value terms,...

According to the Lerner Elasticity Rule, if the price elasticity of demand, in absolute value terms, is 5, and the cost of producing the good is $10, the monopolist should price the product at P= [?] dollars.

Expert Solution

According to Lerner index we have,

(P-MC)/P = -1/elasticity

=> (P-10)/P = 1/5

=> 5P - 50 = P

=> 4P = 50

=> P = 50/4 = 12.5

Thus, the answer is Price is 12.5

Rahul Sunny answered 2 years ago

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