Question

In Freedonia, a single firm is in the domestic steel business. It sells steel at $680 per ton, well above the world price of $375 per ton. The firm is protected against foreign competition by incredibly high tariffs that ban all imports.

The firm has never exported steel. The CEO argues: “The average cost of manufacturing steel, which varies with the rate at which the firm produces steel, is never below $400 per ton. We simply cannot make positive profits selling steel for $375 per ton.” Is this argument convincing? Provide a short answer (at most 4 sentences).

Answer 1

Answer - The firm is a monopolist in the domestic steel market. The firm has average cost above $400 per ton always. It will never reduce price of steel below $400. Its economic profit will be zero if price would equal to $400. The firm will suffer from loss if price goes down from $400 per ton. But the argument is not convincing because foreign firms are selling steel at lower price ($375 per ton) and earning profit also.

A monopolist always wants to earn super normal profit. Thus they will always given favorable argument .