Monopoly Market Structure and Resource Allocation

MICROECONOMICS
STUDENT ID:
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Question 1
a) Monopoly is the market structure where only one seller exists. It tends to have inefficient
resource allocation but is able to maintain as explained using the diagram indicated below.
From the diagram shown above, it is evident that the price charged by the monopolist firm is
higher than the price that would be charged in a perfect competition leading to allocative
inefficiency. However, it is able to maintain this owing to lack of any competition owing to
which it can maintain an artificial scarcity and keep the prices high by not increasing the
production to more socially efficient levels (Krugman, 2017).
b) Advantages of one seller:
 Minimizes spending on setting up infrastructure especially in case of utilities where
entry of a new player would lead to wasteful spending of resources.
 May lead to economies of scale owing to size which would not arise in an industry
where scale cannot be achieved
 Stability of price is assured owing to lack of competition.
Disadvantages of one seller:
 Lapse in productive and allocative efficiency as an artificial shortage is maintained to
maximize profit without regards to efficiency or cost reduction.

 Consumers may be exploited especially with regards to key necessities as no other choice
 Falling quality of services or goods as no competition for the seller.
Question 2
a) Perfect competition market structure is used as the allocative efficiency benchmark as
illustrated using the diagram indicated below.
Allocative efficiency is achieved when price and marginal cost are equal. This is true for perfect
competition as is evident from the above diagram. As the sellers do not make any profit in the
long run, hence the marginal price is the same as price at long term equilibrium.
b) With regards to monopolistically competitive firms, allocative efficiency is not achieved as
the price is not equal to marginal cost but it exceeds the same. This is apparent based on the
following diagram.