Question

The mark-up as a fraction of price for the profit-maximizing quantity \( Q^{*} \) for a monopolist can be expressed in the following form:
\(\frac{p^{*} - C(Q^{*})}{p^{*}} = -\frac{1}{e^{*}}.\)
We can say from this that:

• A. The mark-up is higher for goods with a higher price elasticity of demand
• B. The mark-up is lower for a good with a higher price elasticity of demand
• C. The mark-up is constant for all price elasticities of demand
• D. The mark-up is lower for goods with a lower price elasticity of demand

Hint:

Use the given formula for mark up.

Answer 1

The Correct Option is B

From the given equation, we can observe that the mark-up is inversely related to the price elasticity of demand. As the price elasticity of demand increases (i.e., demand becomes more elastic), the mark-up decreases. Therefore, the correct answer is (b).