Question

'Being the only seller in the market, the monopolist can choose any price and quantity it desires. It can therefore price its product as high as it wants.' Evaluate this statement: Is it true or false? Explain your answer using a graph. (2 marks) – Word count 120

Answer 1

In monopolist market, there is single firm and it has power to decide the price and quantity level. Monopoly market tends to restrict the output level and increase price.

But it does not mean that monopoly can determine price as high as it wants, Following factors affects the ability of firm to decide price level:

• Elasticity of demand: Elasticity of demand determines the ability of firm to decide the price level. If demand happens to be inelastic, the ability of firm to decide higher price rises.
• Cost of production: Cost of production also exerts influence over the price of commodity. when cost of production rises, firm tends to charge higher price and opposite occurs when cost falls.

Thus, it would be incorrect to say that monopolist can charge price as high as it wants,

This is false statement