Answer to Question #257799 in Microeconomics for Megan

Question

2.1 Graphically illustrate and explain the monopolist’s output decision. [5] 2.2 The ultimate determinant of monopoly power is the firm’s elasticity of demand. What three factors determine a firm’s elasticity of demand? Explain this in the context of a South African example of a monopoly. [4] 2.3 What is meant by the term “monopsony power”? What are some sources of monopsony power? What determines the amount of monopsony power an individual firm is likely to have? [3]

Answer 1

2.1

According to the above figure the x-axis measures the output and the y-axis measures the price. AR is the average revenue or demand curve. MR is the marginal revenue curve. MC is the marginal cost curve. The monopolist will produce Q level of output because at that quantity the marginal revenue and marginal cost are equal (at point E). The price charged by monopolists is P.

2.2

 (1) the elasticity of market demand

(2) the number of firms in the market,

(3) interaction among the firms in the market.

2.3

Monopoly power exists when one seller faces no competition from other sellers.

The price elasticity of market supply , the number of buyers in a market, and interaction among buyers are the sources of monopoly power.

The elasticity of market supply, the number of buyers, and how the buyers interact determines the amount of monopsony power an individual firm is likely to have.