Students are required to select any firm having characters of Monopoly. Discuss the basic characteristics of...

Students are required to select any firm having characters of Monopoly. Discuss the basic characteristics of monopoly and profit maximization condition. ( support with diagram)

Solutions

Expert Solution

Characteristics of monopoly -:

Single seller -:
Monopoly market is characterized by presence of single seller. As a result market demand curve and demand curve of monopolist will coincide. Since market demand curve is always negatively sloped , So demand curve of monopolist is also negatively sloped. It means that to sell more of output monopolist have to reduce price and price is reduced not only for last unit but it is reduced on all previous units also. Due to this marginal revenue is less than average revenue.
Entry is Restricted -:
In Monopoly market entry of new firm is restricted as a result monopolist will continue to earn super normal profit in long run.
Demand Curve is Inelastic -:
This is because number of substitutes will be less.

Why Monopoly arises ?

Sometimes monopoly arises due to government regulation. Government may give a single firm exclusive rights to produce or distribute goods.
Cost of production make Single producer more efficient than large number of producers. (natural monopoly)
Monopoly may arise when an important resource is owned by a single firm.

Profit maximization condition -:
* A monopolist will be in equilibrium when either profit is maximized or loss is minimized. For this following condition must be satisfied -:

MR = MC
Slope of MC > Slope of MR

Rahul Sunny answered 6 months ago

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