University of Central Florida (UCF) ECO2023 Principles of Microeconomics Final Practice Exam

In the inelastic segment of its demand curve, a monopolist can raise total revenue by raising price. This is due to the characteristics of inelastic demand, where the percentage change in quantity demanded is less than the percentage change in price. When demand is inelastic, customers are relatively insensitive to price changes, meaning that a higher price does not significantly decrease the quantity sold.

As a result, when a monopolist increases the price in this segment, the additional revenue generated from the higher price outweighs any revenue loss from the slightly reduced quantity sold. Consequently, total revenue increases because consumers continue to purchase a similar amount even at a higher price, reflecting their relatively inelastic response to price changes.

Understanding this concept is crucial for a monopolist in strategizing pricing decisions. It highlights the importance of market power and the ability to set prices above marginal costs in segmenting demand and maximizing revenue under varying elasticity conditions.