Question

Question 3 The below graph shows a monopolist that faces a market demand according to his cost functions. Answer all following questions HC ATC III i I IV ---- 12 17 22 a. Define Monopoly and explain the barriers of entry to such market. b. What is the production level that will maximize profit (or minimize loss) for the monopolist. Explain. C Calculate the monopolist's total revenue (TR) at the production level that will maximize profit (or minimize loss). d. Calculate the monopolist's total cost (TC) at the production level that will maximize profit (or minimize loss). e. What is the profit (or loss) the monopolist will make, at the production level that will maximize profit (or minimize loss) Is the monopolist going to still produce or shutdown? Explain

Answer 1

(A) Monopoly refers to that sort of market structure, where there is single seller and large number of buyer, buying and selling a product which do not have close substitute., moreover the firm becomes the price maker not price taker. In monopoly market structure though there is single seller, so the firm creates barrier to entry of other firms

Reasons for Barriers to entry

1. Natural monopoly: natural monopoly occurs when the firm have higher fixed cost and enjoy economies of scale, as a result there is continues falling of average total cost. The higher fixed cost and occurrence economies of scale in natural monopoly are the important barrier for other firms to entry.
2. Economies of scale:- economies of scales refers to continuous falling in average total cost with the increase in output, so such decrease in per unit cost is an barrier to other firms to compete.
3. Government restriction:- sometimes government may restrict other firms to enter into certain business by allowing permission and licence. Such restriction by the government also creates monopoly.
4. Control over physical resources:- some time monopoly enjoys exclusive control over some scare physical resources which creates monopoly.
5. Innovation: sometimes firm produces highly innovative product due to continuous research and development activities. The firm may protect the innovative product through copyrights and patent rights, so no other firm can copy it. Thus the firm enjoys monopoly over the production of innovative product.
6. Geographical monopoly: - sometimes a monopoly becomes sole provider of goods and services in certain geographic area like certain region and local market.

(B)In order to maximise the profit of minimise loss the monopolist operates at that equilibrium level of output where the marginal cost (MC) = marginal Revenue (MR) and MC intersects MR from its below. It is clearly evident from the above diagram that the above conditions are fulfilled at 17 units of output. So the production level that maximises profit or minimises loss is 17 units of output

(C) it is clearly evident from the above diagram, that the equilibrium level of output is = 17 units

Price of Average Revenue(AR) corresponding to the equilibrium level of output is = $16

Total revenue = Price x Output = $16x17 = $272

The monopolist total revenue at the production level that maximises profits or minimises loss is = $272

(D) it is clearly evident from the above diagram, that the equilibrium level of output is = 17 units

Average total cost(ATC) corresponding to the equilibrium level of output is = $18

Total cost = ATC x Output = $18x17 = $306

The monopolist total cost at the production level that maximises profits or minimises loss is = $306

(E) the equilibrium level of output is = 17 units

Price of Average Revenue (AR) corresponding to the equilibrium level of output is = $16

Average total cost (ATC) corresponding to the equilibrium level of output is = $18

Total profit = (AR-ATC)x Qutput = ($16-$18)x17 = -$34 (Negative profit or Loss)

The monopolist is incurring loss at the equilibrium level of output = -$34

(F) The monopolist will produce and not going to shut down its operation. Because the monopolist to maximise the profit of minimise loss, operates at that equilibrium level of output where the marginal cost (MC) = marginal Revenue (MR) and MC intersects MR from its below. The above conditions are fulfilled at 17 units of output. So the equilibrium level of output is 17 units.

Price of Average Revenue (AR) corresponding to the equilibrium level of output is = $16 which is above than the minimum of average variable cost (AVC).

The firm will shut down its operation when the Price < Minimum of AVC, and continues its operation so long as the price ≥ Minimum of AVC

Thought the price $16 is greater than the minimum of average variable cost (AVC), so the firm going to still produce