Are major-league baseball club profit-maximizing monopolies? Some observers of t

Question

Are major-league baseball club profit-maximizing monopolies? Some observers of this market have contended that baseball club owners want to maximize attendance or revenue. Alexander (2001) says that one test of whether a firm is a profit-maximizing monopoly is to check whether the firm is operating in the elastic portion of its demand cunt (which he finds is true). Why is that a relevant test? What would the elasticity be if a baseball club were maximizing revenue? If a firm were operating in the inelastic portion of the demand curve, it could raise its price and increase profit. Revenue is maximized when elasticity equals 0. If a firm were operating in the elastic portion of the demand curve, it could raise its price and increase profit Revenue is maximized when elasticity equals -1. If a firm were operating in the inelastic portion of the demand curve, it could raise its price and increase profit Revenue is maximized when elasticity equals - 1. If a firm were operating in die elastic portico of the demand curve, it could raise its price and increase profit Revenue is maximized when elasticity equals 0.

Explanation / Answer

Basic rule of economics. 1. When elasticity -1 (inelastic portion) price and revenue go in same direction. So if the firm is operating in the inelastic portion of its demand curve it can raise price and increase revenue and profit. It should stop when it hits the point where elasticity is equal to -1. Answer is C.

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