Question
In: Economics
Evaluate the validity of each of the following statements. Be sure to clearly accompany your explanation...
Evaluate the validity of each of the following statements. Be sure to clearly accompany your explanation using graphs and equations where appropriate.
e) If unsubsidized, a uniform pricing monopolist will only operate on the elastic portion of the demand curve.
Solutions
Expert Solution
TRUE , If unsubsidized , a uniform pricing monopolist will only operate on the elastic portion of the demand curve. Monopoly equilibrium is possible when the elasticity of average revenue curve or demand curve is greater than 1 .
The following graph shows the demand curve, MR curve and three MC curves.
Demand is unitary elastic at B , it is greater than 1 between D and B , Less than 1 between B and D'.
As ed=1 , the corresponding MR is equal to zero. If output and price is fixed at this stage then MR and MC is equal to 0 but MC can never be zero. So, output and price cannot be fixed when demand is unitary elastic.
If price and output were fixed at the stage where demand is inelastic , ed<1, Marginal cost must be negative as here marginal revenue is negative.But this is also not possible.
Marginal cost is always positive , monopoly equilibrium is possible ony at the stage where demand is elastic. Hence, equilibrium is not possible at Q on MC1 curve (where MR=0) or at R on MC2 curve (negative MR). It is possible only at P on MC curve (Positive MR) between D and B . Here, the demand curve is elastic.
Hence, if unsubsidized, a uniform pricing monopolist will only operate on the elastic portion of the demand curve.
Rahul Sunny answered 2 years agoRelated Solutions
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