Quiz 11: Price-Searcher Markets With High Entry Barriers

Business

Profits cannot exist in the long run without barriers to entry, in the absence of barriers new competitors will shed the profits as the supply will increase, which bring down the price, and remove the profits. But at the same time, barriers of entry are not the guarantee of profits as there should exist sufficient demand also. Hence, the statement is true.

This statement is false. This is because the monopolist limits the quantity and increases the price as compared to the competitive equilibrium. The consumer surplus (CS) is much smaller than producer surplus, as the consumer surplus gets transferred to the producer in a monopoly. There is a high "dead-weight loss" of the consumer surplus and producer surplus as compared to the competitive market, which is related to the decrease in quantity. Hence, the social surplus becomes smaller in a monopoly market as compared to a competitive market.

Monopolists do not always charge highest price because the demand curve of monopolist is downward sloping, which leads to less demand at more price and more demand at less price. The crucial condition for maximizing the profit of monopolist is the equality if his MC and the MR. If this condition is not met then he will not be able to maximize his profit. Profitability will depend on the elasticity of demand, if the demand is inelastic the profit will always be high, and if the price elasticity of demand is elastic, profit will be nominal or zero. The profitability will also depend on the degree of barriers of entry of a new firm. If restrictions are very high then the profit of monopolist will always be high.

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