Question

The demand curve of a monopolist is

• A. Perfectly elastic
• B. Very elastic but not perfectly elastic
• C. Perfectly inelastic
• D. Very inelastic but not perfectly inelastic

Answer 1

A monopolist is the only producer of a good and hence the market demand curve is the demand curve it faces. A monopolist faces a standard downward sloping demand curve meaning a monopolist must lower prices to sell more of its product. Lets see the options -

A. Perfectly elastic - A perfectly elastic demand curve is one which is horizontal. Here the price is fixed and given from the free market equilibrium. This kind of demand curve belongs to the perfectly competitive markets who are price takers. Hence option is incorrect.

B. Very elastic but not perfectly elastic - Recall that the objective of a monopolist is to maximize his profits. The monopolist must decrease prices to sell more output. When demand is elastic, on decreasing prices - quantity rises by a higher proportions thus raising total revenue. As marginal costs is always positive, a monopolist must always produce on the elastic portion of the demand curve to earn higher profits. Hence option is correct. He obviously does not produce on a perfectly elastic demand as explained under option A

C. Perfectly inelastic - If monopolist faces such a demand curve then it means that he will supply a fixed quantity at any price he wants. However this is not the case and to sell more quantity, monopolist must decrease prices. So monopolist demand curve cannot be vertical (which is perfectly inelastic). Hence option is incorrect.

D. Very inelastic but not perfectly inelastic - So if monopolist produces at inelastic portion of the demand curve then on decreasing prices, quantity will rise only by a smaller proportion and hence total revenue would be falling. Thus profits would be falling as well due to positive marginal costs. So a monopolist will never produce at the inelastic part of the demand curve. Hence option is incorrect. Also he wont produce on a perfectly inelastic demand as expalined under option C.

Option B is correct.