Monopoly and Fair Return

Chapter 10 (Tentative Due Date by November 1) Question 2 Discuss the major barriers to creation into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially onlyifi able-bodied? LO1 The major barriers to entry in an industry argon economies of dental plate, legal barriers such as patents & licenses and other strategic or pricing barriers. Economies of scale occur only in large firms who are able to reach a minimum efficiency scale take and operate at that point for a long period.This high TC results in a low ATC and high efficiency. Once a huge firm innovates, it protects that very idea or product done patents disallowing other firms to copy their product. Government licensing could also result in limited entry of firms because they might not provide permission for other firm to enter the market. Another means to reduce competition within an industry is to manipulate price. Mon opolists, being a price setter, could slash their price just to make it tougher for their competitor to survive.Other strategic methods could include increased advertisement to a level where the lesser and smaller firms will find impossible to compete against. These barriers of entry can prove to be pertinent for the existence of a pure monopoly. The absence of some of these barriers would lead away to a market structure resembling an oligopoly or perhaps even a monopolistic agonistical industry if the number of firms was to be large. And in the case where there are no barriers a strictly competitive market would appear.But definitely some barriers are within legal rights. For example a patent protects the product for a number of years and its understandable that a monopoly would want to restrict the usage of their research and hard work. Similarly if the price slashes are pushing out competition, they are at the alike(p) team encouraging competitors to reduce their costs/price w hich is great for the consumers and the market in general. Question 3 How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm?Why does it differ? The demand curve of a purely competitive firm is horizontal because it has perfect substitutes and a very large number of firms. The demand curve is perfectly elastic and thusly horizontal. On the other a pure monopolys demand curve is downward sloping because market demand is not perfectly elastic. The monopolist is the industry and its demand curve is hence the market demand curve. The difference in characteristics such as number of firms, types of product and barriers to entry cause the distinguished demand curve.Question 9 Explain verbally and chartically how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between (a) socially optimal (marginal? cost) pricing and (b) fair? happen (average? total? cost) pricing. What is the dil emma of regulation? LO5 Thinking of a firm operating at a point where ATC is still falling. Each small firm would throw a much smaller output signal at a higher ATC. So efficient and lowest-cost production requires a single seller. This is represented in the graph attached and named Graph 1. The monopoly could charge any price they choose.One option is to charge the socially optimal price where price equals marginal cost. This is the allocatively efficient output level where all marginal benefits exceed marginal cost. An alternative pricing method is the fair return theory where price is equal to ATC. Under this operation the monopoly is able to break even and continue operation. A fair return is equal to normal profit. The dilemma of regulation is caused by these very regulation methods. These regulatory measures which are set to achieve the most efficient allocation of resources in P=MC actually result in the monopoly making a loss.Similarly the problem with the fair return pric e is that it doesnt completely solve the issue of under-allocation. Question 11, LAST WORD How was De Beers able to aver the world price of diamonds even though it produced only 45 percent of the diamonds? What factors ended its monopoly? What is its new strategy for earning economic profit, rather than just normal profit? Despite producing 45% of the diamonds, De Beers was able to control the world price due to the ability to control its own production levels and high market share.The fact that so many diamond suppliers were coming through and providing alternatives such as synthetic diamonds forced De Beers to invest in advertising and promoting their own diamonds. These were factors simply out of De Beers control. More diamond reserves were being spy and caused competition. So De Beers was forced to stop its operation as a monopoly and instead as the diamond supplier of choice. Problem 1 Suppose a pure monopolist is faced with the demand schedule shown below. Calculate the miss ing total? revenue and marginal? revenue amounts.Assuming that MC is $39, determine the profit? increase price and profit? maximizing output for this monopolist. Assuming that the ATC is $52. 50, what is the monopolists profit? Verify your answer by comparing it to the Total Revenue -Total follow approach. LO2 Total Revenue from top to bottom, in dollars 0, 100, 166, 213, 252, 275, 288, 294, 296, 297, 290 Marginal Revenue from top to bottom in dollars 100, 66, 47, 39, 23, 13, 6, 2, 1, -7 The profit maximizing price is $63 and profit-maximizing output is 4. Monopolists profit is TR-TC=252-(4*52. 50)=>252-210=$42