Economic Equilibrium and Monopoly

The assignment content discusses the concepts of monopoly, monopolistic competition, and perfect competition. It highlights the differences between these market structures, including the number of firms, demand curves, price controls, and entry barriers. The content also explores the characteristics of monopolistic competition, such as differentiated products and free entry and exit of firms. Additionally, it touches on the concepts of marginal revenue, marginal cost, and equilibrium in a monopolistically competitive market.

PART A
Q1
A monopoly is diametrically opposite to perfect competition.
 Monopoly has 1 firm, while perfect competition has many firms
 Monopoly faces a down sloping demand curve, while a firm in perfect competition has a
horizontal demand curve.
 The monopolist is a price maker, while a firm in a price taker in perfect competition.
 Monopoly has entry barriers while perfect competition has free entry and exit of firms.
A monopolistic competition market structure is closer to perfect competition, than to
monopoly.
 In monopolistic competition there are less firms as compared to a perfect competition.
 Each firm in monopolistic competition faces an elastic demand curve that slopes down- each
firm has limited control over price.
 All goods are homogeneous in perfect competition, while they are ‘differentiated’ in
monopolistic competition. This differentiation leads to the birth of a product group, which
consists of goods that are close substitutes of each other.
 Perfect competition and monopolistic competition are similar as they do not allow abnormal
profits in the long run, and allow free entry and exit of firms. .
Q2
Such firms face a downward sloping curve, which means that price and quantity are inversely
related. If they increase quantity then they face a lower price, which reduces profits. Ina way they
face a tradeoff between lowering average cost( by increasing quantity) and lower price. The balance
between price and average cost is reached by equating marginal revenue with marginal cost.
Q3
FALSE, because a firm in monopolistic competitive structure cannot make positive economic profits
in the long run. This is because there is free entry and exit. If profits exist new firms will enter and
ensure prices are lowered till all positive profits are wiped out. Equilibrium is reached when only
normal profits are made.
Q4
Option A is best. This is because AVC < P < ATC which implies losses in the short run. The firm
continues as variable costs are covered by revenues. In the long run such losses will lead to closure
as the monopolist cant continue with losses in long run.

Option b is wrong as the firm will not shut down since variable costs are covered. Also once it shuts
down it cant start again in long run unless some other factors change.
Option c is wrong because shut down and exit are the same thing. The firm will do none.
Option d is incorrect as a monopolist cant continue with losses in long run.
Option e is invalid as we don’t need any more information.
PART B
Q5
a. TR=P*Q
b. MR at each point= change in TR/ change in Q
P Q TR = P*Q MR
50 0 0 -
40 5 200 200/5=40
30 10 300 100/5=20
20 20 400 100/10=10
15 30 450 =50/10=5
10 50 500 =50/20=2.5
5 102 510 =10/52 = 0.192
2.5 200 500 10/92= 0.108
c. MC= 5. We use the MC=MR rule. The point where MR=MC is the equilibrium point that
maximizes profits. As per the table MR=5 at Q = 30 and P=15
d. Yes GOOGLE is a monopoly in a narrow sense. This sense considers firms that provide all the
services that Google does. No firm has the range of services that Google does, which makes it a
monopoly. However there are some substitutes of various services offered by Google, which
break the monopoly of Google. Hence the real answer lies in how we define the ‘product group’
to which Google belongs.
REFERENCES

IMperfect Competition . (n.d.). Retrieved july 31, 2017, from Colarado.edu:
http://www.colorado.edu/Economics/courses/Markusen/fall05-4413-001/unotes7.pdf
perfect competition. (n.d.). Retrieved August 2, 2017, from Staffwww.fullcoll.edu:
http://staffwww.fullcoll.edu/fchan/Micro/4perfect_competition.htm