Question

Do you think that a monopolist firm and a competitive firm have the same market power? Explain you answer theoretically and graphically. Also show that market power is zero when elasticity is equal to unity.
​

Answer 1

Answer:

3.5.3 Sources of Monopoly

The price elasticity of demand is the most important determinant of market power, due to the pricing rule: L = (P – MC)/P = -1/Ed. When the price elasticity is large ( |Ed| > 1), the demand is relatively elastic, and the firm has less market power.