A monopolist chooses the amount of output to produce by finding the quantity at

Question

A monopolist chooses the amount of output to produce by finding the quantity at which marginal revenue equals marginal cost. Answer the following questions:

Why monopolist determine the price and quantity where MR = MC?

What are the problems for the monopolist if they set price based on the MC = Price?

See the diagram and explain how government regulates the natural monopoly to improve benefits to the society?

Costs & Revenue Long Run Average Costs continue to fall as economies of scale are generated High level of PROHITS but high price, low output, and INEFFICIENT Long Run Average Cost Low price, high o'cutEFFICENT, but LOSSES A Long Run P1 Marginal Cost AR Q1 Output MR Copyright: www.economicsonline.co.uk

Explanation / Answer

Answer

Monopoly is not a price taker and has market power. Unlike Perfect competitive firm Monopoly has downward sloping demand curve. A perfect competitive firm sells any amount of output at the same Price But in order to sell more units monopolist have to reduce Price. Thats why If monopolist increase quantities they are not getting precious price but has to reduce price in order to sell more thats why they set MR = MC instead of P = MC.

The major problem they faced if They Charge P = MC is that they will not earn any profit and hence they behave like perfect competitive firm. They are price maker and not price taker. Hence They can earn profit by charging Price where MR = MC.

In order to regulate natural Monopoly Government can maket rule that Natural Monopolist has to charge P = MC. By doing that Governmrnt can increase overall surplus. But You can see from above graph that MC is below AC. Hence If government set this rule then Natural Monopolist will not Produce becaus e P < AC and henc ethey are facing losses. Because of this government will have to given them Total Amount = Green area above. i.e. (C - P1)*Q1. By doing that Government ensured that efficient amount of output is produced and by paying the above mentioned amount to natural Monopolist also made sure that monopolist does not incurred loss and did not shut down

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.