Quiz 11: Monopoly


A monopoly firm produces relatively less output for raising the price. It tries to maximize profit by selling less output at higher price. If the output is not produced according to the potential level, then a society would be worse off. Lower output leads to an inefficient resource allocation. If the available resources are not optimally utilized to produce required goods and services, then it would lead to an undesirable outcome of the society. An increase in the output is socially beneficial because if will lead to an efficient resource allocation. Thus, output should be produced more to achieve socially beneficial outcome.

(a) A pure monopoly is considered as an industry in which only one firm produces products having no close substitutes. The only supplier of heat fuel in an isolated area is considered as pure monopolist considering that no other substitutes are available for heat fuel. (b) Consumers in a town can purchase other personal computers of different brands, so the only supplier of IBM computer not book cannot be considered as a pure monopolist. If the substitutes are available, then buyers can shift their demand other products. This reduces the monopoly power of seller. (c) Substitutes are available for the digital camera, so the only supplier of a digital camera cannot be considered as a pure monopolist. Availability of substitutes reduces the monopoly power of a supplier.

One would invest in the competitive firm considering the future benefits though it is making zero economic profits. Present profitability is not considered by the investors while taking investment decisions. Future anticipations play an important role while determining the level of investment. Opportunity cost plays an important role since it is evaluated by the investors while investing in a competitive firm. Opportunity cost capital would be less in the present than the value of it in the future.

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