Question

1. Suppose the local electrical company, a legal monopoly based on economies of scale, was split into four firms of equal size, with the idea that eliminating the monopoly would promote competitive pricing of electricity. What do you anticipate would happen to prices? Why?

2. Suppose a monopolist could charge a different price to every customer based on how much he or she were willing and able to pay (versus charging the same price to all their customers). How would this affect the monopolist's profits? Why?

3. A perfectly competitive firm is expected to make a $0 profit in the long-run. What type(s) of profit would you expect a monopolist to earn in the long-run? Why the difference?

Answer 1

1 - The monopoly firm have the power to inflence the prices because they are the sole provider of the goods and services and charge the prices as per their will. , But when the firm are split into four in order to increase the competitiveness , the equlibrium price will decrease as a result of increased competition , increased supply. Also if any firm tries to charge higher price will be out of the market. This would increase the demand and reduce the price in market .