Question

Part (a) Consider a firm called Health-R-Us that is a monopoly. How does Health-RUs decide the price to charge and quantity to sell of the good it has a monopoly on? Illustrate your answer using a fully labelled and explained market diagram. Assume Health-R-Us is making monopoly profits and illustrate these on the same diagram. In addition, indicate the area on your diagram that illustrates the efficiency cost (the dead weight loss) of the monopoly, and explain why this dead weight loss arises.

Part (b) Assume Health-R-Us is a legal monopoly: it is a monopoly due to legal protection from the government in the form of a patent issued to the company. Imagine that the government withdraws the legal protection for Health-R-Us such that the market becomes competitive. Will a typical individual firm in this competitive market make economic profit in the long run? Why or why not? Use an appropriate firm-level diagram to illustrate and explain your answer.

Part (c) Your answers to parts 2a and 2b illustrated different levels of profit made by an individual firm in both a monopoly market structure and a competitive market structure respectively. In part 2a you also indicated the dead weight loss of a monopoly. Assume now that Health-R-Us has discovered a vaccine for coronavirus. Why might the government be willing to grant (and allow to remain in place) a patent to HealthR-Us, despite the dead weight loss and the ensuring monopoly profits caused by such a patent? Explain your answer. For simplicity assume the vaccine is only relevant for the domestic market (i.e., there is no global market for vaccines).

Answer 1

A. In case monopoly price and quantity is in the control of seller only. He wants to earn more profit here by adjusting the price of commodity as per his need. In case he choose for less quantity to sell or he do less production then the optimum level so as to earn higher rate of profit it may leads to fall Heavy burden on consumer. Monopolist may do less production due to its inefficiency also. There may be any reason for this but result is one called dead weight loss. In figure 1 you can see the shaded portion as dead weight loss. He is earning more profit by producing less there.

B. If in case government withdraw it's patent right from Health -r-US then it becomes a normal firm of industry like others. In perfect competition market there is free entry or exit for all the firms. In monopoly market this firm is making more profit however in long run and in perfect competition market it's profit becomes zero profit. There is no situation of profit in long run. As if there is profit other firms easily attract and enter in this market and ultimately profit goes down. This is clearly shown in figure 2.,in that figure E1 shows point where there is no profit or no loss called zero profit level. However if there Health -R-US produce lower level of output it's AR =Average revenue goes down.

c.In domestic market if we consider above both thing together then we can see that there is profit and dead weight loss in part 1 and normal profit in part 2.(zero profit). Generally government is not in favour of creating monopoly in market. Here the health firm discovered covid vaccine. Due to its necessity in present time, even there is dead weight loss government is ready to provide to get it's right patent. This might increase the demand for vaccine and profit for monopoly firm but if is it not patent then in perfect competition market some other firms also find the way to produce vaccine in order to earn more profit through illegal means which is wrong done to this particular firm. However government may take some action in order to reduce the dead weight loss like - if firm is not able to produce due to its lack of efficiency then government may help them so that dead weight loss can be minimized.