Question

Monopoly Assignment 1. A way in maintaining control over a market in order to insure the firm is the sole provider of a product, is to keep potential rivals out of the market. List three elements in preserving a monopoly, briefly discuss each. 2. Monopoly breeds inefficiency in resource allocation by producing too little and charging too high a price. Do you agree or disagree. Discuss your argument. 3. Assume a firm buys a perfectly competitive market and turns it into a monopoly. Explain and illustrate the effect on price and quantity before and after the take-over. 4. List the steps taken by a monopolist in deciding to produce, and determining to sell, profit maximizing output. 5. Monopoly and Perfect Competition Compare the two market structures for similarities and differences. Illustrate a price maker and a price taker.

Answer 1

1.

The first element is lack of substitutes. It will force the buyers to buy goods that are to be produced by the monopolist. The second element is the barriers to entry. It will make the firms to be out of the market. As a result, there will be only one firm in the industry, and monopoly will be preserved. The third element is the lack of arbitrage of the products sold by the monopoly. It means that people cannot exchange goods by buying at lower price and selling at a higher price. It will also preserve the monopoly.

2.

I agree with the statement that there is an inefficiency in the monopoly market. To support my agreement with the statement, It can be observed that a monopoly firm neither produces its goods where, the price is equal to ATC or price is equal to the marginal cost. Further, the output is not produced at the level, where the ATC is at the minimum point. It makes, presence of allocative inefficiency, productive inefficiency and excess capacity with the firm. So, a monopoly firm that is unregulated in nature, is going to have inefficiency in the market.

3.

Before the takeover of the perfectly competitive market, price will be relatively lower and output will be relatively higher. But, after the takeover, the price will become high and output will be relatively lower when the market becomes monopoly.

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