Question

3. A single-price monopolist has the schedules given in the table below.

Quantity (units)	Price (MYR)	Marginal revenue (MYR)	Marginal cost (MYR)
1	22	20	6
2	20	16	8
3	18	12	12
4	16	8	18
5	14	4	28

a. Determine the profit-maximizing level of output, price as well as the amount of profit or loss at this level. Clarify how you obtain the answer.

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b. Compare between the perfect competition and monopoly market structure.

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[Total: 10 marks]

Answer 1

A monopoly firm is a single seller because there are barriers to entry. In a pure monopoly industry, there is a single firm. The barriers to entry are those factors which lead to the restriction of entry by the new firms. These are patent laws that restrict the entry of new firms. License and copyrights are also an example of barriers to entry.

A monopolist firm is a maker and profit-maximizing condition is

MR=MC

Corresponding to this condition profit-maximizing quantity is 3 units and corresponding to this quantity price on the demand curve is $18.

Profit=(P-MC)Q

=(18-12)3

=$18.

b.

The comparison of monopoly and perfectly competitive firm are;

A monopoly firm is a single seller because there are barriers to entry. In a pure monopoly industry, there is a single firm. The barriers to entry are those factors which lead to the restriction of entry by the new firms. These are patent laws that restrict the entry of new firms. License and copyrights are also an example of barriers to entry.

A monopolist firm is a maker and profit-maximizing condition is

MR=MC

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC