Question

4a) i. Explain why the monopolist will not operate on the inelastic portion of the demand curve. ii. Derive the slope of the Monopolist marginal revenue cure. 4b) i, Illustrate why and how a government may intervene in the monopoly structure. ii. Discuss why and how a monopolist practices price discrimination.

Answer 1

a) i) This is because when production is done in inelastic region, profits are kept increasing with higher prices and reduced quantity. This is because when demand is inelastic, revenue is higher with increased price. Hence monopolist tries to extract as much profit as it can and this is done by raising price till all the inelastic portion is served. Hence the monopolist does not operate on the inelastic portion of the demand curve

ii) Demand is P = a - bQ. Total revenue = PQ = aQ - bQ^2. MR = dTR/dQ = a - 2bQ. slope of MR is -2b.

b) i) Government can intervene by regulating the behaviour of monopolist and legalizing the price to be equal to MC or AC. This will raise its production and reduce price. Consumer surplus rises and monopoly's profits are reduced. This intervention is required because monopoly charges a higher price and produces a lower quantity which creates a deadweight loss.

ii) Price discrimination is practiced by monopolist to raise more profits. This can be done by charging different prices from different consumers, depending on their elasticity of demand and by preventing resale