Johns Hopkins UniversityBUSINESS ECON

A monopolist has set her level of output to maximize profit. The firm's marginal revenue is $20, and the price elasticity of demand is -1.2. The firm's profit maximizing price is approximately: 

1. $20 
2. $40 
3. $200 
4. This problem cannot be answered without knowing the marginal cost. 

Answer is $120 which not in any of the choices above.

Step-by-step explanation

It has been given that monopolist has set the level of output to maximize profit.

The profit-maximizing level of output is that level of output at which marginal revenue equals marginal cost.

Therefore, at current level of output (profit-maximizing level of output) MR of monopolist equal MC of monopolist.

Hence, with MR being $20, MC is also $20.

Price elasticity of demand is -1.2.

Computation of the profit-maximizing price -

Profit-maximizing price = MC × (e/e+1)

Profit-maximizing price = $20 × (-1.2/-1.2+1)

Profit-maximizing price = $20 × 6 = $120

So, the profit-maximizing price is $120.