PRICE AND OUTPUT DETERMINATION UNDER MONOPOLY QUESTION

PRICE AND OUTPUT DETERMINATION UNDER MONOPOLY QUESTION

  1. Define monopoly. Explain how price is determined under monopoly.
  2. What are the considerations that a monopolist must bear in mind fixing the price of his commodity? Is monopoly price necessarily higher than the price under competition?
  3. Explain the factors which determine price under simple monopoly. Use a diagram to illustrate your answer.
  4. Distinguish between simple monopoly price and discriminating monopoly price. How is the former determined?
  5. Both the monopolist and the competitive producer aim at maximizing their net gain.

Show how they achieve their objective.                        •

  1. Show how monopoly price is affected by .(i) elasticity of demand, (ii) substitutes, (iii) potential competition, (iv) regard for future demand, and (v) risk of legal interference.
  2. How far is monopoly detrimental to the consumer? Indicate the restraining influences to which a monopolist is subject.
  3. 8.  What is price discrimination? Explain how price output equilibrium is established under it.
  4. Discuss in brief the measures which are taken by the government to regulate or check the monopolies.
  5. Compare price and output policies under monopoly and perfect competition.
  6. “Whereas in competitive equilibrium the price charged by the firm equals its marginal, cost, under monopoly the price set is above the marginal cost”. Explain.

A. SHORT ANSWER QUESTIONS

  1. Define monopoly.
  2. Listthe key requirements for preservation of a monopoly
  3. Does a monopolist charge the highest possible price for its output?
  4. Why does a monopolist produce less than the socially efficient quantity of output?
  5. What are the ways that policy makers can respond to the problem of monopoly’?
  6. What is the necessary condition for a monopolist to- be able to price discriminate’?
  7. Is price discrimination always undesirable’?
  8. State the conditions where price discrimination is workable.
  9. What are the main economic effects of monopoly’? ANSWERS:1.Monopoly is an industry in which there is only one supplier of a product for which

  10. there are no close substitutes and in which it is very hard or impossible for another . firm to co exist.
    1. The key requirements for preservation of monopoly are (1) legal restrictions on potential rivals to enter the industry (ii) Exclusive production rights given by the government for the production of a good for a certain period of time (iii) Control over the scarce resources (iv) Deliberately erecting entry barriers (v) Large sunk costs (vi) Technical superiority and (vii) Availing largo economies of scale.
    2. A monopolist has the power to determine either the price at which he will sell the product or the quantity he wishes to sell.
    3. No. He does not charge the highest price for his product. A monopolist too is subject to the demand for his product. A high price would cause ‘buyers to buy less of that good. The monopolist chooses its price by first choosing the optimal quantity based

    on the intersection of MR and MC and then charges the price consistent with that quantity.

    1. For a monopolist, P > MR because for a monopolist to sell another unit, it must reduce the price on the marginal unit and all of its previous units. Therefore, while a

    monopolist equates Mk and MC, he charges a price that is greater than MC which causes consumers to buy les’ than the efficient amount of the good.

    6. The policy makers can try to make (i) monopolized industries more competitive (ii)

    regulate the behaviour of the monopolies (iii) turn private monopolies into public enterprises.

    7. The monopolist must be able to separate buyers according to their willingness to pay.

    1. Price discrimination can sometimes be damaging to the consumers interest, but at other times it can be ‘beneficial also. Some firms cannot survive without it. Price

    discrimination may help in reducing prices to all consumers if there are substantial economies of scale.

    1. Price discrimination is workable when three conditions are realized (i) the seller must have monopoly power. (ii) the seller must be able to separate buyers into separate

    classes where each group has a different ability to pay and (iii) the original purchaser

    cannot resell the product or service.       .

    10. The monopolist does not achieve productive efficiency and ‘allocative efficiency. As

    he is not pushed to produce output at the minimum average cost, therefore, he violates the concept of productive efficiency.

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