Question

1. What should a monopoly due to its price if it is currently operating at an output level where marginal revenue is $40 and marginal cost is $43. Explain your rationale.

2. Why will a profit maximizing monopoly not charge a price in the lower region of the demand

curve?

3. Make an argument as to why Society should discourage the formation of monopolies.

4. Make an argument as to why Society should encourage the formation of monopolies

Answer 1

1. The profit maximising level of output is produced at a point where the marginal revenue equals the marginal cost and the corresponding point on the demand curve determines the price. If the MR is less than the MC, the monopolist should increase the price such that MR = MC. At the current scenario, the cost of production an additional output is more than the revenue generated by it.

2. The monopolist will not produce in the inelastic zone of the demand curve because the marginal revenue becomes negative in that zone and then it cannot be equated to the positive marginal cost. The total revenue falls as more output is produced.

3. Formtion of monopolies discourage product innovation and development. In most of the cases, the monopoly produces only a unique product. With no competition in the market, it does not have an incentive to invest in new product development or innovation or invention because of which the consumers have to opt for what is being offered.

4. In some cases, monopoly is better for the society as a whole because certain resources like natural resource have a very high extraction or processing cost. More firms competing would result in depletion of the resources. At times, single firm or monopolist saves cost by not letting anyone else enter the market.