Question

True or False (please explain the reasons of why you choose true or false)

1. A producer can charge a price far greater than marginal cost and earn large profits so long as barriers to entry prevent competitors from entering the industry.

2. Relative to competitive pricing, oligopoly pricing increases producers’ profits, reduces consumers’ surplus, and (in net) reduces social surplus.

Answer 1

1 True

It is the situation of monopoly market. Through calculating marginal sales and the marginal costs of manufacturing an additional product, a monopolist may assess the overall benefit and price. When the marginal revenue exceeds the marginal costs, the business can raise income by producing another production unit.

There are barriers to entry inside a monopoly to discourage rivals from entering the market. Such obstacles include: economies of scale leading to natural monopoly; physical resource control; legal market restrictions; patent, trademark or copyright protection; and business coercion tactics such as unfair pricing.

2. True

In an oligopoly, rates are usually higher than in total competition. Because the industry does not dominate, companies can cooperate instead of competing with each other and prevent others from entering the market.

Businesses join forces to increase prices. It decreases the surplus available to customers and lowers people's welfare.

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