Question

Currently, a fast food firm has a monopoly in the university student union.The monopoly pays the university $83,000 a year to maintain the monopoly.The firm earns an economic profit of $298,500 per year. Another fast food firm is desirous of entering the market and offering its fare to students. The manager of the first firm calls the university president asking her to maintain the first firm’s monopoly. How much would the first firm be willing to pay to keep the monopoly?

Answer 1

A monopolist earns economic profit due toIt is because of the monopoly market power, a monopolist can earns economic profit . Due to the competition, economic profit falls. In the given question, the monopolist will try hard to maintain its monopoly power even if the level of its economic profit is zero. In order to maintain the market power, the first firm will be willing to sacrifice its economic profit which can be latr recovered by increasing the price component. Thus, the firm will be willing to pay $290,000 i.e. its economic profit to keep the monopoly.