Question

1. Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain.

2. Define natural monopoly. What does the size of a market have to do with whether and industry is a natural monopoly or not?

3. Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain.

4. What is the profit-maximizing level of output and profit-maximizing price for a monopoly? Explain in terms of demand, marginal revenue, average total cost, and marginal costs.

5. Does a monopoly produce more or less output than the level of output that maximizes total surplus?

6. Why does deadweight loss result from a monopoly?

Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy

Answer 1

Answer 1. Monopoly refers to a market structure where there is only one seller who has the sole possession of such particular goods. An example of government induced monopoly is in case of Defence. In case of defence the countries government makes policies and issues weapons and doesn’t allow any entry of any other public or private firm. Although a monopoly leads to no competition of that particular good and thus efficiency and development doesn’t take much that much. But it cannot be considered necessarily bad as in case of defence if private firms are allowed to compete then it might lead to more wars and more production of destructive weapons, which is bad for the economy. Monopolies also leads to consumers paying higher prices of gooda and thus is good in case of defence as weapons should be occupied by every person. Thus, we can see in a nutshell that monopoly is not always bad.

Answer 2. As the name suggests natural monopoly arises when the cost of starting up and fixed cost are very high that many firms are not able to start their business which ultimately leads to natural monopoly. It is usually seen in areas where it is required to have special technology or possession if inputs that aren’t easily available.

Size of a market often affects a natural monopoly as greater the size greater will be the peoduction of products and more difficult it will be for other firms to enter the market as setup costs will be much highwr and the technology needed will also be latest.

Answer 3. Marginal revenue refers to additional revenue generated when an additional unit of product is sold. In case of monopoly the MR is less than the peice of it’s goods and which leads to positioning of marginal revenue curve below the demand curve. In monopoly the mopolist cannot sell the goods at any cost that they want to sell and thus the monopolist has to reduce the price of goods to sell additional units of a good because of inverse relation between price and demand curve which leads to a downward sloping demand curve. Thus marginal revenue is also decreasing leading to downward sloping demand curve. The monopolist will sell at the equilibrium quantity where the MR curve and MC curve are equal and that point is lying below the demand and the ATC curve.

Answer 4. The profit maximization level of output in monopoly is where the MC and MR curves intersect and if we draw a perpendicular from the equilibrium quantity point and the point where it touches the demand curve is the point where the monopolist would sell to maximize it’s profit. At the equilibrium price the firm is able to make enough profit to cover it’s cost of peoduction and earn some economic profit. At that point the AC curve, MC curve and MR curve are all lyimg below the Demand or AR curve.