Question

Exercise 25 Exercise 26 Explain how is it possible for a firm to continue operating in the short run, even if revenues are insufficient to cover Discuss whether a monopoly (or more generally, firms with significant market power and the ability to maintain supernormal profits in the long run) may benefit the public. all of its costs. Exercise 28 Exercise 27 explain why, for a monopoly firm (and more generally any w facing a negatively sloped demand curve), the MR curve is not identical to the AR curve. Explain why breaking up a monopoly into smaller firms may not always be a good idea. What other solutions can governments adopt to check monopoly power?

I am having trouble with these questions over monopolies in Economics.

Answer 1

25.

In the short run, firm cannot change its all factors of production. So, the firm continues its operation as long as it covers its variable cost. It means that price is above the average variable cost.  Here, firms can limit its losses even if it can only cover the variable cost part of the total cost. Till this level, firm will continue its operation in the short run. It is done in the hope that some players will do out and price will rise to cover all the cost.

In the long run, the firm will change its capital level and try to get the revenue that can cover all the cost. If not, then firm will shut down in the long run.

26.

In monopoly, there is inefficiency of productive level and allocative level. It creates higher price ans lower output in the market. There are also no substitutes in the monopoly market. Hence, monopoly does not benefit the economy.

27.

Monopoly has demand curve that has different level of elasticity at different price level. It creates MR curve to be separate than AR curve. Further, monopoly firm is price setter that can apply price discrimination as well. So, these curves are different form each other.

28.

It will not be a good idea, because economy of scale will be lost with the smaller firms. So, consumers will get the product at a higher price as ATC will be very high.

To resolve the problem, government can regulate the monopoly to put a price where It is equal to the ATC level.  It will help firm to earn only normal profit. Or, government can make price to the level, where Price = MC. But, government has to give subsidy to the monopoly to remain in business in long run.