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Homework answers / question archive / Are major-league baseball clubs profit-maximizing monopolies? Some observers of this market have contended that baseball club owners want to maximize attendance or revenue
Are major-league baseball clubs profit-maximizing monopolies? Some observers of this market have contended that baseball club owners want to maximize attendance or revenue. Alexander (2001) says that one test of whether a firm is a profit-maximizing monopoly is to check whether the firm is operating in the elastic portion of its demand curve (which he finds is true). Why is that a relevant test? What would the elasticity be if a baseball club were maximizing revenue?
A. If a firm were operating in the elastic portion of the demand curve, it could raise its price and increase profit. Revenue is maximized when elasticity equals-1.
B. If a firm were operating in the inelastic portion of the demand curve it could raise its price and increase profit. Revenue is maximized when elasticity equals 0.
C. If a firm were operating in the elastic portion of the demand curve, it could raise its price and increase profit. Revenue is maximized when elasticity equals 0.
D. If a firm were operating in the inelastic portion of the demand curve, it could raise its price and increase profit. Revenue is maximized when elasticity equals -1.
A monopolist always operates on the elastic portion of the demand curve. It never operates on the inelastic portion of the demand curve because marginal revenue becomes negative which can't be equated to positive marginal cost under equilibrium.
Hence, the correct option is (A) If a firm were operating in the elastic portion of the demand curve, it could raise its price and increase profit. Revenue is maximized when elasticity equals-1.
