Question

1. Is it possible for a monopolist to produce under losses? What conditions must occur for this to happen?
2. Why do monopolies occur? Why do governments try to regulate or eliminate monopolies?
3. What is meant by price discrimination? What conditions must be necessary for price discrimination to occur?
4. Use the welfare triangle graph to show how monopoly is inefficient when compared to perfect competition.

Answer 1

Answer 1 - Yes the monopoly can earn the losses . It can continue to produce under the losses in short run but not in the long run.

In the short run , if the price of the monopoly is above its AVC , but lower than ATC , it is incurring losses but it can still continue to produce provided that it is able to recover the fixed costs. In the long run , if the price is less than ATC , the firm will be in losses and will have to close down in production as losses in long run will not let the firm sustain .

2 - monopolies occur as a result of the sole ownership of the resources , the patent over the technology or the production of good , economies of scale etc which create the barrier for the other firms to entet.

The monopolies exercise the full market power amd charge the customers with higher price leading to decreased consumer surplus , inefficient market , deadweight losses and market failures. All these factors persuade the government to act and regulate the momopoly in public welfare.