Question content area

Part $1$

We write the percentage markup of price over marginal cost as

StartFraction Upper P minus MC Over Upper P EndFractionP$$MCP$.$

For a$$profit$-$maximizing monopolist, how does this markup depend on the elasticity of$$demand$?$ Why can this markup be viewed as a measure of monopoly$$power$?$

Part $2$

Market power is the ability to charge a price

above

marginal cost. For the$$profit$-$maximizing monopolist,

Part $3$

A$.$

StartFraction Upper P minus MC Over Upper P EndFraction equals negative StartFraction $1$ Over Upper E Subscript Upper D EndFractionP$$MCP$=1$ED

will$$hold$,$ implying that as the price elasticity of demand$$increases$,$ market power decreases.

B$.$

StartFraction Upper P minus MC Over Upper P EndFraction equals negative Upper E Subscript Upper DP$$MCP$=$ED

will$$hold$,$ implying that as the price elasticity of demand$$increases$,$ market power decreases.

C$.$

StartFraction Upper P minus MC Over Upper P EndFraction equals negative Upper E Subscript Upper DP$$MCP$=$ED

will$$hold$,$ implying that as the price elasticity of demand$$decreases$,$ market power decreases.

D$.$

StartFraction Upper P minus MC Over Upper P EndFraction equals negative StartFraction $1$ Over Upper E Subscript Upper D EndFractionP$$MCP$=1$ED

will$$hold$,$ implying that as the price elasticity of demand$$decreases$,$ market power decreases.