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If a firm with market power is not making enough profit (in equilibrium): a
If a firm with market power is not making enough profit (in equilibrium):
a. it will lower price, thereby increasing total revenue because demand is elastic.
b. it will raise price, thereby increasing total revenue because demand is inelastic.
c. it will exit the industry in the long run if economic profit is negative.
d. it will expand sales until it reaches the unit elastic point on demand.
Expert Solution
If a firm with market power is not making enough profit (in equilibrium):
The best answer is b. it will raise the price, thereby increasing total revenue because demand is inelastic.
When the firm has market power, it can raise the price and at least some of its customers will choose to pay the higher price. In turn, that will increase revenue and profit.
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