Question 6: Consumers are worse off buying less output at a higher price from a monopoly...

Question 6: 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 properly labeled graph. 5 marks

Expert Solution

We know that monopoly is a market structure where there is large number of buyers and only a single seller who sells differentiated product due to which it has full control over the price of the product. Whereas, in perfect competition, due to the existence of large number of sellers who sells homogenous product ,they have no conrol over the price of the product.

Now, since monopoly is profit miximizer, it sells the commodity at a price which is higher than the price charged in perfect competition. This is because there is a single seller in the monopoly who can raise its price without worrying about substitues of its product or loosing its buyers. With higher price the consumer or buyer is worse off since they will now demand a less commodityand hence, the commodity produced or consumed will be less than that of perfect competition.

In the diadram, we can see that for perfect competition, the price is at P0 and output at Q1 which indicates MR=AR=Demand. For monopoly, output is taken at Q1 i.e., whereMR=MC since for monopoly MR Demand. The output Q2 when extended gives price at P1. Hence, price is higher for monopoly and output is less in comparison to perfect competition.

Rahul Sunny answered 1 year ago

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