Answer to Question #195563 in Microeconomics for JUSMENT

Question

a) Show graphically and explain what is meant by consumer equilibrium.

b) Provide a clear argument explaining why under a monopoly MR (y) < AR((y) for y >0, 

assuming the same price must be charged.

c) The Namibian Competition Commission is entrusted as the principal institution to 

promote and safeguard fair competition in Namibia by promoting the efficiency, 

adaptability, and development of the Namibian economy. With a help of a diagram 

clearly distinguish the welfare effects of a monopoly and a competitive firm. 

 

Answer 1

a)

When a customer thinks he "cannot improve his situation either by gaining more, spending more, or changing the amounts of things he buys," he is said to be in equilibrium. A rational customer would buy something up to the point that the price of the thing equals the marginal utility derived from it. If this condition is not met, the customer may either buy more or less. It is the state of equilibrium achieved by product end-users, which refers to the number of goods and services they can purchase with their current level of income and current cost rates. A consumer's equilibrium allows a customer to get the most satisfaction out of his money. If he buys more, MU will continue to decline, and a situation will arise where the price paid exceeds MU. He will reduce consumption to prevent negative utility, that is frustration, and MU will continue to rise until $P=MU$

b)

A monopoly seller is a price maker. As a result, in order to sell more units of its product, he or she can lower the price. The marginal revenue would be negative depending on the price cut. $MR<AR$ $(=P)$ is the product of a decrease in the price level, resulting in a negative marginal revenue. Since monopolists will lower prices in order to sell more, $MR$ would be negative, and therefore $MR<AR$ under monopoly.

c)

The Namibian Competition Commission (NaCC) is established under Section 4 of the Competition Act of 2003 as an autonomous juristic individual subject only to the Namibian Constitution and the law. The Commission has authority in Namibia and is obliged to act impartially and “without fear, favor, or prejudice” in carrying out its duties. According to section 16 of the Act, the Commission is responsible for the implementation and compliance of the Act, as well as the regulatory duties of reviewing and correcting anticompetitive acts, such as discriminatory trading practices and anticompetitive mergers, as well as market opening.

The results showed that monopolies contribute to higher equilibrium prices and lower equilibrium quantities, resulting in lower non-monopolist welfare and higher monopolist welfare than under ideal competition. Since the increase of price eliminates market surplus, the monopolist is able to charge a higher price, which limits gross production and thereby reduces welfare. The deadweight welfare deficit, also known as the social expense of monopoly, is equivalent to the field ABC.