Question

1) List the five characteristics of pure monopoly.

2) Describe the demand curve facing a pure monopoly and how it differs from that facing a firm in a purely competitive market.

3) Explain why the marginal revenue is equal to the price in pure competition but not in monopoly.

Answer 1

1.

The characteristics of monopoly firm

a.

Since the profit-maximizing condition for the monopoly is

MR=MC

Corresponding to this condition the output is determined and on the demand curve the price will be determined.

b.

Since the firm is a single seller of the goods

c.

The monopoly firm is a price maker.

d.

The demand curve is downward sloping and MR curve falls below the demand curve.

The firm is price maker and therefore for selling more units the monopolist firm need to decrease the price. This is the reason why at each output level, marginal revenue is less than the price because price should be lowered to increase sales quantity.

e.

Since in the case of pure monopoly there is no competitors, therefore firm has the control over price in the long-run also and firm makes super normal profit. It means positive economic profit.

2.

The demand curve of monopoly firm is downward sloping while the demand curve of perfectly competitive firm is horizontal line.

3.

The price and MR are equal in purely competitive firm because for each additional unit same price is charged.

The demand curve of monopoly firm is downward sloping because  the firm is price maker and therefore for selling more units the monopolist firm need to decrease the price. This is the reason why at each output level, marginal revenue is less than the price because price should be lowered to increase sales quantity.