Question

a. XYZ Inc. is accused of being a monopoly. The CEO claims that it’s not a monopoly, arguing that if XYZ were to raise its price it would lose sales. This is because consumers always have the option to spend their money on other goods. Is the CEO’s argument persuasive? Explain (6 pts.)

b. (Unrelated to the above) A monopoly firm is currently maximizing profit, earning economic profit of $10 million per year. It is now successfully sued by a former employee who is awarded $1 million. A manager of the firm argues that to recoup the lost $1 million, the firm needs to raise its price. Do you agree? Explain. (6 pts).

Answer 1

a. The CEO,s arguement is persuasive. This is because if the consumers have substitutes of the commodity available in the market such that the consumers can shift to those if the price of the commodity of concern is increased, then the firm cannot be classified as a monopoly. The monopoly structure is that where there is only one firm operating in the industry with no close substitutes of the product.

b. The magager of the firm is giving an agreeable solution. However, it is not optimal.We know that the firm is already operating at the optimal level and is earning positive economic profit. Since the concerned firm is operating in a monopoly market structure, it does not need to raise the price in the market. It can simply exercise price discrimination and try to maximize the producer surplus through that. This way, firm will be able to earn maximum profits. The degree of price discrimination can vary according to the market conditions.