Question

1. How does monopoly arise? Give two reasons and explain one of them. b) State the profit-maximizing conditions under monopoly.

Answer 1

A monopoly can arise due to barriers to entry for other firms in the market. These barriers to entry can be a because of various reasons like ownership of raw material, legal regulations, high initial cost of starting the business etc.

Two main reasons why we find monopoly are:

Government regulation and ownership of Natural resources. We will talk about ownership of the raw material. For example, China has a monopoly over rare earth material in the world market. The Chinese firms producing Rare earth mineral charge high price for exports. They are the only nation to have these raw materials and there is no substitute for these products giving them a monopoly.

b) Under a monopoly, a firm tries to match its marginal profit with its marginal cost to maximize its profit. Whereas in the perfect market condition the same firm will be matching its marginal revenue with its average revenue.