3. The ‘monopoly markup’ is the degree to which a firm with market power can price...

3. The ‘monopoly markup’ is the degree to which a firm with market power can price above marginal cost. Consider two scenarios. In the first, a local retailer is given a monopoly on selling lager (a kind of beer) in Lubbock County. In the second, the retailer is given a monopoly on selling all kinds of beer. In which scenario do you expect the monopoly markup to be proportionately larger? Your answer should include both graphical and verbal components.

Expert Solution

In scenario 1, monopolist has a control over a particular type of beer. So elasticity of demand is less than compared to the case when monopolist has control over selling all kinds of beer (highly elastic market supply), Hence monopoly mark up is lower in the second scenario.

So larger the elasticity of demand, lower is the markup.

Rahul Sunny answered 1 year ago

The ‘monopoly markup’ is the degree to which a firm with market power can price above...

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