We write the percentage markup of price over marginal cost as \frac{P - MC}{P}.
For a profit-maximizing monopolist, how does this markup depend on the elasticity of demand? Why can this markup be viewed as a measure of monopoly power?
Market power is the ability to charge a price above marginal cost. For the profit-maximizing monopolist,
A. \frac{P - MC}{P} = -\frac{1}{E_D} will hold, implying that as the price elasticity of demand increases, market power decreases.
B. \frac{P - MC}{P} = -E_D will hold, implying that as the price elasticity of demand increases, market power decreases.
C. \frac{P - MC}{P} = -\frac{1}{E_D} will hold, implying that as the price elasticity of demand decreases, market power decreases.
D. \frac{P - MC}{P} = -E_D will hold, implying that as the price elasticity of demand decreases, market power decreases.