Question

Question 2Part (a)Consider a firm called Health-R-Us that is a monopoly. How does Health-R-Usdecide the price to charge and quantity to sell off 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 deadweight loss) of the monopoly, and explain why this deadweight loss arises.

Part (b)Assume Health-R-Usis a legal monopoly: it is 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-Ussuch that the market becomes competitive. Will a typical individual firm in this competitive market make an 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 deadweight loss of a monopoly.

Assume now thatHealth-R-Ushas discovered a vaccine for coronavirus. Why might the government be willing to grant (and allow to remain in place) a patent to Health-R-Us, despite the deadweight 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) Monopoly is the market structure where there is only a single seller who is the only owner of the firm. The products and price are decided as per his choice. The products also are not close substitutes for each other. Supernormal profit is a situation where the seller can earn profits above the normal profits. Hence, a monopoly firm can earn a supernormal profit in the long run as well as a short run because the seller has control over the prices to be fixed of the product and the entry new firm is also restricted

The monopolist will select the profit-maximizing level of output where MR = MC, and then charge the price for that quantity of output as determined by the market demand curve. If that price is above average cost, the monopolist earns positive

A deadweight loss is a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium. ... Price ceilings, such as price controls and rent controls; price floors, such as minimum wage and living wage laws; and taxation can all potentially create deadweight losses.