Question

3. a) Analyse in detail the profit-maximising condition for a monopolist, indicating the role of the own-price elasticity of demand in your analysis.

b) In what sense is a monopoly “inefficient”?

c) Can duopolists involved in quantity competition do better by colluding rather than playing non-cooperatively?

d) Provide an example of a simultaneous play game where the Nash equilibrium would be inefficient, and explain why this happens.

Answer 1

Ans

1 profit maximizing condition is that MR=MC. Only at this place price elasticity =1.Before it price elasticity >1 and it is profitable to decrease price. After it price elasticity <1 and so it is profitable to increase price

2 it leads to greater price and lower output thus reducing total surplus

3 Yes because that can reach monopoly solution by collusion. Competitive behaviour leads to 2/3rd price of Monopoly price and greater output when cost of production =0

3 prisoners dilemma because lack of truth and ASSYMETRIC information