Question

In: Economics

Suppose GoSports pennant monopoly is broken up and the pennant industry becomes perfectly competitive. We would...

Suppose GoSports pennant monopoly is broken up and the pennant industry becomes perfectly competitive. We would expect this breakup to result in:

more social welfare

generally the same production

lower production

greater production

Solutions

Expert Solution

Both options a and d are correct.When a monopoly is broken up and becomes a perfectly competitive the production will increase and the social welfare also increase.while comparing the monopolist and perfectly competitive market monopolist charges a higher price and lower output than the perfectly competitive market.when the monopoly is broken up and becomes perfectly competitive the pennant industry will charge a lower price and produce more output and result in more production and will also increase the social welfare than when pennant industry was a monopoly.When penant industry was acting as a monopoly they were the price makers and not the price takers.Hence the penant industry could decide the price at which they should sell their product hence they will set a higher price and produces lower output than the perfectly competitive market and thus reduces the social welfare.In monopoly the price is set above the marginal cost and thus earns a positive economic profit while in the case of competitive market the price is equal to the marginal cost.When the monopoly breaks down and becomes perfectly competitive it will start producing goods and services at an equilibrium which is more economically efficient and thus increases the social welfareIn the given diagram the monopolistic price Pm is greater than the perfect competitive price pc and the output of monopoly Qm is less than the competitive price Qc and hence when monopoly becomes perfectly competitive the price decreases,output increases and thus production also increases


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