Question

3. Why does one electric company can operate more cheaply than two for a given city?

4. Under what circumstances monopoly may offer efficiency advantages over perfectly competitive industry.

5. Discuss the difference between monopolistic competition and monopoly.

Answer 1

Q3 - one electric company can operate more cheaply than two in a given city because

One electricity company will have monopoly power in the city. It will indulge in two part policy . It will chrge more to commercial industry or businesses in the city and it will charge less from domestic consumers .

By this it can increase its profits

Also due to economies of production , monopoly rights by govt and monopoly profits it will reduce its cost so it will operate more cheaply

While if there re two power companies then they will resort to in price war and doesn't operate at cheaper rates

Q2 Monopoly may offer efficiency advantage over perfect competition by

1. Economics of scale - favorable locations, cheap raw materials availability, cheap labor , closeness to markets etc can increase efficiency which decrease in cost of production

2. Quality if goods - if monopoly produces good quality of goods

3. As monopoly incurs profits in the long run then it can do research and development for new innovation and technology

Q5 difference between monopolistic and monopoly -

1 in monopolistic competition - there are large no. Of sellers and in monopoly there is single seller

2 high competition in monopolistic while no competition due to monopoly of single seller

3 product differentiation with no close substitutes in monopoly. Product differentiation will close substitutes in monopolistic

4. Barrier to entry and exit of firms in monopoly while free entry and exit in monopolistic

5 prices of products high in monopoly then monopolistic competition

6 demand is inelastic in monopoly and elastic in monopolistic