10. This question is hard/interesting. Consider a typical monopoly firm, which h
ID: 1218768 • Letter: 1
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10. This question is hard/interesting. Consider a typical monopoly firm, which has the typical shaped curves (downward sloping demand, MR below D, U-shaped ATC curve, increasing MC). (15 points) a) If the monopolist finds a way to lower marginal cost for each unit pro- duced, will it pass some of these savings along to consumers in the form of lower prices? Or will it raise prices to take advantage of wider profit mar- gins? Or will it keep the price unchanged? Illustrate using a graph. b) Okay, now think about firms in a perfectly competitive market. If these firms find a way to lower marginal costs, how does price respond? Does price respond in the same way as it did for a monopoly? c) If the monopolist experiences an increase in fixed cost what will happen to the price, the quantity of output sold, and profit for the monopoly firm?Explanation / Answer
Monopolist would not hike prices but would not pass on the benefit to customer, He would just keep the profits to himself
B) In perfectly competitive market prices would get lower if production cost decreases, In perfectly competitive market other firms will compete to lower the price so market price automatically gets lowered.
C) If monopolist have incrased fixed cost then prices will rise, out would remain the same or lowered, Profit would be same.
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