Question

3. Define the monopoly market power problem. Why is this a problem?

4. Draw a two-panel model (graph) for a firm producing and selling good X in a purely competitive market. In the first panel show the market for good X; in the second panel show the firm in long run equilibrium.

·         Show the effects of an increase in demand for good X in this market. Show the effects of a decrease in demand for good X in this market. What conclusions can be drawn from this model?

·         Under what condition will a competitive firm earning a loss (a negative profit) continue to operate in the short run? Under what condition will the same firm shut down? Demonstrate these conditions graphically.

5. Draw a model (graph) for a firm producing and selling good X in a pure monopoly market. What conclusions can be drawn from this model?

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Answer 1

First question is answered below

3.

Monopoly market is a market with only one producer firm selling goods and services to a large base of consumers. The goods sold by this firm have no close substitutes as well as no competitor firm selling it.

This gives the monopoly firm undue market power to mould the market as per its wishes and set prices such that it maximizes its profits.

This is a problem because from the point of view of soceity, such behavior by firm leads to efficiency loss as prices are set too high so as to extract consumer surplus as much as possible which leads to creation of deadweight loss, which is an efficiency loss for the soceity.