Question

National Coal Corporation? (NCC) is a large? government-owned firm in? Murasia, a developing country. It is a? profit-maximizing monopoly in the coal market. Following a slump in industrial? production, the Minister for Commerce and? Industry, Salam? Hayek, feels that NCC should reduce the prices of coal. He argues that since more units of coal will be sold at a lower? price, the market will become more efficient and? NCC's profits will increase.

A. he assumes that the law of demand does not hold for a monopoly firm.

B. he ignores the impact of the fall in price on consumer surplus.??

C. he assumes that the demand for coal is perfectly inelastic.

D. he correlates the reduced profits of NCC with the industrial slump.??

E. he confuses overall surplus with producer surplus.

Answer 1

Option E is correct

For a monopoly if the prices are reduced then sales are expected to be increased but this would not increase the profit for the monopolist because it will the now operating on the less elastic side of the market demand curve and lowering prices would reduce revenue as well as profit. There must be a confusion between the overall surplus and producer surplus because with this reduction in the price the overall surplus will be higher but the producer surplus will be lower.