Microeconomics Questions: A monopoly has: A. A perfectly elastic demand curve B.
ID: 1107828 • Letter: M
Question
Microeconomics Questions:
A monopoly has:
A. A perfectly elastic demand curve
B. A perfectly elastic supply curve
C. Less elastic demand curve than a competitive firm
D. An inelastic demand curve
A firm with market power is producing output at which price = $8, MR = $5, average variable cost = $6, MC = $10. To maximize profits, the firm should:
A. Increase price
B. Decrease price
C. Keep price the same
D. Increase output
Through very effective marketing campaigns, Mylan has convinced consumers that its EpiPen is superior to other competing products. As a result, the own-price elasticity of demand for EpiPen has changed to -1.11 from -2.0. If you are the CEO of Mylan and you are charged to maximize your company’s profits, how much will you set your EpiPen’s price over its marginal cost? With your marginal cost remaining unchanged, estimate your percentage price hike as you adjust your mark-up factor to reflect the new demand elasticity. Discuss the ethics of your pricing strategy. Who is helped? Who is hurt? Overall, would the price hike help or hurt more?
Explanation / Answer
A monopoly has Less elastic demand curve than a competitive firm and more of the product will only be demanded when the firm lowers the price of the good it produces. So the correct option should be C.
MR = $5 and MC = $10 means that the cost of additional unit is more than the revenue earned from additional unit. The firm shouold increase price to earn more revenue and profits.So the correct option should be A.