Question

Let a monopolist demand curve be given by $Q = P^e$, where Q is output, P is price, e is the price elasticity of demand (e <-1), and Marginal Cost = Average Cost = $\alpha$. If $P^c$ and PM represent the price under perfect competition and monopoly, respectively, then which of the following is/are NOT correct?
($CS_M$ and $CS_C$ represent the consumer surplus under monopoly and perfect competition, respectively.)

• A. $P^c$ = $\alpha (\frac{e}{1+e})$
• B. $P^M$ = $\alpha(\frac{e}{1+e})$
• C. For e=2, $CS_M$ = $CS_C$.
• D. For e closer to -1, the ratio $CS_M$ / $CS_C$ increases.

Answer 1

Answer: (A), (C)

$P^c$ = $\alpha (\frac{e}{1+e})$

Answer 2

The correct option is (A): $P^c$ = $\alpha (\frac{e}{1+e})$ and (C): For e=2, $CS_M$ = $CS_C$.