Question

1. What are the reasons for monopoly, (list the standard reasons for barriers to entry)?

2. Where do prices come from in a monopoly?

3. How are output and pricing decisions made by a monopolist entrepreneur?

4. How is this different from Perfect Competition?

5. Draw three graphs of a monopoly, one in each of the three situations, a, b, and c and demonstrate how you would choose a price and quantity and discuss what the monopolist would do in each situation.

6. What happens in the long-run to the monopolist in each situation and what does this say about efficiency in monopoly markets?

Answer 1

1.

Reasons for monopoly are as follows:

A. Excessive high cost of investment, creating natural monopoly and creating barriers to entry

B. Exclusive rights on natural resources, creating monopoly as no other players can access that.

C. Legal rights such as patent, IP rights on creative works that legally bars the other from entering into the market

D. Government restrictions creating barriers to entry due to issue of security & national interest

2.

Demand curve in monopoly is downward sloping. So, price is decided between the inelastic and elastic demand part of the curve so that profit is maximized.

Price is set in a monopoly where the MR cuts MC. A line vertically drawn through the intersection of MR & MC and cuts demand curve. The horizontal line from the intersection of at demand curve to the Y axis gives the price that will maximize the profit.

3.

Output & price decision takes place at a level, where MR = MC. Output at this level is profit maximizing output.

4.

Monopoly is different from perfect competition, in ways that:

A. Monopoly has one firm that is price maker, but in perfect competition has many firms with free entry and exit and firms are price takers.

B. Monopoly earns positive economic profit in long run, but perfectly competitive firm earns zero economic profit in the long run.

C. Perfect competition achieves productive & allocative efficiency, but monopoly firm is inefficient.

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