Question

3a. Name & explain three significant ways that a monopolist behaves differently than a perfectly competitive firm? How does this impact customers?

b. does your answer change if the monopolist is the government?

c. how does price discrimination fit in?

Answer 1

a) three significant ways that a monopolist behaves differently than a perfectly competitive firm

1. monopoly earns supernormal profits in the long run whereas in the perfect competition the firm earns only normal profits in the long run, the customers have to pay higher prices because of this when buying a monopolist product.
2. under monopoly there is no entry of new firms but under perfect competition there is free entry and exit of firms this leads to fewer product options with the customers
3. lastly under a monopoly the monopolist is the price maker and under perfect competition the firm is a price taker. Therefore the customers play no role in deciding the price under monopoly and have no control like in perfect competition.

b) If the monopolist is the government then the monopolist usually charges lower prices and gives subsidies to the poorer sections of people. And it cares about the needs of the consumers

c) When the monopolist has the power to charge higher profits it likes to maximize is profit by extracting all the consumer surplus and charging different prices to people with different demands.