Question

Why will the monopoly want to operate in the elastic portion of the demand curve? Give two reasons!! :)

Confused! :( Thank you!! :D

Answer 1

where is the elastic portion?

Answer 2

above the midpoint right?

Answer 3

*midpoint of the demand curve ?

Answer 4

yes

Answer 5

in this region, is the price relatively high? or relatively low?

Answer 6

price is relatively high right?

Answer 7

yeah so they have higher MR

Answer 8

oh! so would one reason be that they will have a higher marginal revenue if they operate in the elastic portion?

Answer 9

yes

Answer 10

yay! :) what would another reason be though? :/

Answer 11

let's say hypothetically they want to operate in the INelastic portion of the demand curve

that would mean they would have to lower prices to get more people to buy otherwise they make product no one wants. This leads to lower MR as stated above. This also means that costs go up because MC (marginal cost) is always increasing after a certain min point. So the more you produce, the higher the total cost. This means that they not only have lower MR, but the costs are higher too which leads to lower profits overall. It's possible that profit would be negative here.

Answer 12

this page here

http://mnmeconomics.wordpress.com/2011/08/15/why-does-a-monopoly-never-produce-in-the-inelastic-part-of-its-demand-curve/

shows a demand curve and a MR curve. It shows that MR = 0 when elasticity = 1 and MR < 0 when you're in the inelastic portion. So we have negative MR here, definitely something the company wants to avoid.

Answer 13

wait so would that mean if you operate in the elastic portion, you will be likely to have more profit? :/ not sure if i understood that correctly?

Answer 14

yeah because costs are lower and MR is higher

Answer 15

ahh okay awesome!! yay:) thank youu!!