Question

1. Explain what is meant by a monopoly. Give an example as to how this type of market structure exists.

2. Why do monopolies exist? What is meant by market power?

3. Explain how increasing returns to scale leads to a natural monopoly.

4. How does a monopolist maximize profits?

5. Discuss the welfare effects of monopoly.

Answer 1

1.

A monopoly is a single seller of any goods or services. In this market, the MR curve is below the Down-ward sloping demand curve. This is because a monopolist needs to decrease the price for selling more units of goods.

Since the market power can be defined as the ability of a firm to increase the market price of a good or service over marginal cost so that profit can be maximised. The example of natural monopoly is tap water.

This monopoly arises due to market power.

2.

The monopolies will exist due to market power and inelastic demand curve and barriers to entry. Since the market power can be defined as the ability of a firm to increase the market price of a good or service over marginal cost so that profit can be maximised.

3.

When the long-run average cost curve falls with the increase in the production, then it is called increasing return to scale. In other words, if inputs are doubled and output increases more than double, then it is known as the increasing return to scale. When there is an increasing return scale advantage of any firm, then this firm can deter the entry of any new firm due to market power. Hence this leads to natural monopoly.

4.

A monopoly firm is a price maker and profit-maximizing condition is

MR=MC

Corresponding to this condition, quantity is determined and corresponding to this quantity price is determined.