Question

Provide an explicit and analytical commentary on the following: “Since there are no close substitutes for the monopoly's product, the monopoly can charge any price it wishes. Thus, since a monopoly can set any price it wants, it always makes a profit.”

Answer 1

The statement is incorrect.

The demand curve for a monopoly is steeper but downward sloping.A download sloping demand curve is in accordance with the law of demand.It means that if the monopoly raises price,the quantity demanded would fall.However due to the inelastic curve, the price has to rise very much for the quantity demanded to fall. If the monopoly charges a price too high then the demand may be zero because the product may not be affordable by the consumers.

Thus,it is incorrect to say that a monopolist can charge any price and still make profit.It has to fix price according to the MR=MC method.