Answer to Question #210949 in Microeconomics for Momin ali

Question

i. Explain how a monopolist chooses the quantity of output to produce and price to 

charge. Give graphical representation.

ii. Describe the ways policymakers can respond to the inefficiencies caused by the 

monopolies.

Answer 1

i .

The monopolist will select the profit-maximizing level of output where MR = MC, and then charge the price for that quantity of output as determined by the market demand curve. If that price is above average cost, the monopolist earns positive profits.

ii. Inefficiencies can be reduced using the following methods.

• By increasing competition within a monopoly: this has the problem that the increased competition can lead to increased costs of production as the monopolist loses its economies of scale. The consumer may end up paying a higher price because of this.
• Government control of the monopoly: this has the problem that government-run organizations are generally very inefficient. They may charge a low price to consumers but their inefficiencies incur a heavy cost on society.
• Regulations against monopolies: this has the problem that firms are disincentivized from increasing their size and enjoying the economies of scale that reduce the costs to society.