Question 1: (5 Marks) Consumers are worse off buying less output at a higher price from...

Question 1: Consumers are worse off buying less output at a higher price from a monopoly than a price taking firm. Explain this statement with the help of a graph (properly labeled).

Solutions

Expert Solution

Yes, it is a fact that when there are high prices, consumers tend to buy lesser in price taking(perfect competition) firms rather than firms in monopoly.

Reason

Monopoly firms controls the market are generally price makers. The demand for their products is generally downward sloping or sometimes inelastic. This means that the products served by monopoly turns out to be prioritized by the consumers. Hence, rising prices in monopoly won't make the firm to lose its customers.

Graphical representation below ?

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Now, coming to the part of price taking firms such as firms in perfect competition.

Reason

The firms in perfect competition are always price takers because there are a large number of firms. The firms always have an infinite elastic demand in the market due to higher competition in the market. So, a slight change in the prices by these firms, would make them lose a huge number of customers, because these prices are determined and accepted by the customers.

Graphical representation below ?

Rahul Sunny answered 1 year ago

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