The Inverse Elasticity Rule
A monopoly chooses that price that maximizes the difference between total revenue and total cost. The basic markup rule can be expressed as (P − MC)/P = 1/PED. The markup rules indicate that the ratio between profit margin and the price is inversely proportional to the price elasticity of demand. The implication of the rule is that the more elastic the demand for the product the less pricing power the monopoly has.
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