question archive 1)A monopolist has constant marginal cost of $10/unit and sells its output at a price of $12
1)A monopolist has constant marginal cost of $10/unit and sells its output at a price of $12
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1)A monopolist has constant marginal cost of $10/unit and sells its output at a price of $12.50/unit. What is the elasticity of demand being faced by this firm?
2)The CEO of a large company believes that if he raises wages for his workers by 5%, this will lead to a smaller-than-5% increase in worker hours. In other words, the CEO believes that wage elasticity of labour supply at his company is _____
a. negative
b. inelastic
c. unit elastic
d. elastic
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1)A monopolist has a constant marginal cost of $10/unit and sells its output at a price of $12.50/unit.
According to the Lerner Index,
1/E = (P - MC)/P
1/E = 12.50 - 10 /12.5 = 2.5/12.5
E = 12.5 / 2.5 = 5
The elasticity of demand faced by this firm is 5.
2)The answer is b.
The wage elasticity of labor supply is computed as:
- percentage change in hours worked / percentage change in wage
In this question, when wage increases by 5%, if the hours worked increases by less than 5%, then it implies that the wage elasticity of labor supply is less than 1. In this case, labor supply is said to be inelastic.
