Question

Show a Monopoly earning super normal profit and explain what are the costs of having monopoly in the economy. How can government prevent monopoly in the market?

Answer 1

Monopolies can earn supernormal profits in the long run .Profits are maximised when MC=MR ie marginal cost is equal to marginal revenue.At this point where MC=MR,output is Q and Price is P. At point Q ,price (AR) is above Average total cost(ATC) . So the firm earns supernormal profit equal to the area ABCD.

A monopolist produces less output and sells at a higher price.The cost of monopoly is the reduction in the consumer surpIus that arises from monopoly output and and decisions of price .

In order to protect the interest of the consumers , the government may control monopolies.Monopolies always want to fix the highest possible price from the customers in order to earn maximum profit .The government can fix the price and prevent the monopoly firms from earning huge profit.Thus price capping ie controlling price increase,preventing the formation of cartels ,government ownership will prevent monopoly in the market.