Question

Answer the following questions about monopolists.

1. What are the three reasons why monopolies arise? Give one example of a firm that is a monopoly and the reason why it is a monopoly.

2. How does a monopolist determine its profit-maximizing level of output? How does it determine the price that it charges?

Answer 1

Monopoly is a market structure in which there is only one producer and seller of a commodity but there are many buyers. The seller has full control over the market.

Reasons which give rise to monopoly are-

1. Ownership of a key resource: There are some factors which are owned by a single firm, and hence that firm becomes a monopolist in production of that particular commodity.
2. Economies of scale: There are some firms for which the average total cost of production decreases so much with increase in output that it eliminates other firms from competition and acts as a monopolist.
3. Government regulations: Government regulations also give rise to some monopolies when government gives rights to single firms to produce a particular good or service in the form of Patents, Copyrights, Trademark etc.

An example of a monopoly may be your local natural gas company, this is because it is the sole provider or natural gas in your area and since there are no other providers of natural gas in your area hence you have to buy from that particular company.

The profit maximizing level of output and price of a monopolist is determined at the level where it marginal cost is equal to marginal revenue. Graphically it is the intersection of MR and MC curve. This can be found graphically as-

In the above fig P and Q are the profit maximizing Price and Output respectively.