Question

What are the effects of anti-trust laws on a monopoly graph? Show shifts on graph.

Answer 1

The concept of antitrust is around governmental restrictions that aim to limit incumbents in any given industry from consolidating high power. It target to improve competition and prevent monopolies from consolidating more powerful. In the enclosed figure at point E where MR = MC, the price OP is determined. The government aim to set a maximum price below the OP (monopoly price). When government puts regulation on the price of natural monopolies then at point E₁, the monopolist’s demand curve becomes P₁ E₁d. He can sell at the regulated price of P₁ any output up to X₁; output exceeding X₁ will be sold at declining prices as reflecting by E₁d portion of the demand curve. The profit generated will be is E₁A per unit. When government set an even lower price equal to AC rule i.e., P = AC the equilibrium occurs at point E_2; monopolist earns normal profits