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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

A monopolist has MC = Rs 20 per unit (constant). In market A, price elasticity of demand is 2 and in market B it is 4. Using MR = P(1 - 1/e) and MR = MC in each market, what are the profit-maximising prices in A and B respectively?

Market A's price is Rs 40 and market B's is Rs 26.67. Setting MR equal to MC of Rs 20 gives P = 20/(1 - 1/e), which is 20/0.5 for elasticity 2 and 20/0.75 for elasticity 4. The less elastic market pays more.

  1. ARs 40 and Rs 26.67Correct
  2. BRs 26.67 and Rs 40
  3. CRs 30 and Rs 25
  4. DRs 10 and Rs 5

Explanation

Market A: P(1 - 1/2) = 20, so P = 20/0.5 = Rs 40. Market B: P(1 - 1/4) = 20, so P = 20/0.75 = Rs 26.67. Reversing them would charge more in the more elastic market, which is the sign mistake. Higher price goes to the less elastic market A.

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