A monopolist faces a downward sloping linear market demand and his variable cost of production is zero. The profit maximizing price will (A) lie in the strictly inelastic region of the demand curve (B) lie in the strictly elastic region of the demand curve (C) be at the unitary elastic point of the demand curve (D) be equal to the marginal cost of production

2 marks, −0.667MicroeconomicsMonopoly and price discriminationMonopoly equilibrium and marginal revenueModerateabout 2 min

IIT JAM 2021 Question 29: Monopoly and price discrimination

A monopolist faces a downward sloping linear market demand and his variable cost of production is zero. The profit maximizing price will

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Answer and worked solution

Answer: (C)

With zero variable cost, marginal cost is zero, so the monopolist maximises revenue by setting marginal revenue equal to zero.

For a linear demand curve, marginal revenue is zero at the midpoint, which is the unitary-elastic point. The answer is (C).

The trap: (B) lie in the strictly elastic region of the demand curve

A monopolist with positive marginal cost prices in the elastic region, but with zero marginal cost the optimum slides exactly to the unitary-elastic point where revenue peaks.

Monopoly and price discrimination has come up 128 times in 7 exams since 2004.

What this question tests

This question is on Monopoly equilibrium and marginal revenue, part of Monopoly and price discrimination in Microeconomics.

How a monopolist sets price and output where marginal revenue equals marginal cost.

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