Question

For a profit maximising monopolist, the ratio of the profit margin to price (also known as the Lerner Index or the relative mark-up) has a relationship with the price-elasticity of demand at the profit maximising price. Then, which of the following statements is CORRECT?

• A. The larger the elasticity of demand at the profit maximising price, the greater is the relative mark-up
• B. The power to sustain a price higher than the marginal cost depends only on the profit maximising price
• C. At the profit maximising price, given costs are greater than zero, the price elasticity of demand is strictly larger than unity
• D. At the revenue maximising price, the price elasticity of demand is greater than unity

Answer 1

Answer: (C)

At the profit maximising price, given costs are greater than zero, the price elasticity of demand is strictly larger than unity

Answer 2

The correct answer is (C): At the profit maximising price, given costs are greater than zero, the price elasticity of demand is strictly larger than unity