Suppose the equilibrium price in the market is $100 and the marginal revenue associated with the linear (inverse) demand function is $50

Economics Dec 18, 2020

Suppose the equilibrium price in the market is $100 and the marginal revenue associated with the linear (inverse) demand function is $50. Then we know that the own price elasticity of demand is:

Select One (show work):

a. 2

b. 1

c. It cannot be determined from the information contained in the question

d. -2

Expert Solution

Here,

The formula to calculate Marginal Revenue(MR) is given by:

MR= P(1-(1-(1/E1)))

E1 is the own price elasticity of demand.

Given that,

Price(p)= 100

MR=50

So, we can write,

50=1001-{1-(1/e)}

Suppose that e is the own price elasticity of demand

or, 1/2= 1-(1/E)

or, 1/e=1/2

or, e=2

Hence the required own price elasticity of demand equals to 2.

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