explain why a monoplist seeking to maxmise price will always operate in the elastic part of the demand curve?

Question

explain why a monoplist seeking to maxmise price will always operate in the elastic part of the demand curve?

thanks!

Answer 1

She won't. By definition, the elastic part of the curve is the area where a percentage decrease in demand will be greater than the percentage increase in price that caused it. The monopolist will always price at the point where elasticity is 1 (unit elasticity). Anything lower would mean that more profits could be made by raising the price, and anything higher that profits are being lost.

Example: If price elasticity is .9, a 10% increase in price leads to a 9% decrease in demand. Current profits are d*p, where d is demand and p is price. New profits will be .91d*1.1p, or 1.001d*p. That's more profit, so the monopolist raises prices.

Now suppose elasticity is 1.1, where a 10% increase in price leads to an 11% decrease in demand. Current profits are d*p. New profits would be .89d*1.1p, or .979d*p. The monopolist lowers prices.