“INTERNATIONAL ISLAMIC UNIVERSITY, ISLAMABAD”

FACULTY OF MANAGEMENT SCIENCES

BACHELORS IN BUSINESS ADMINISTRATION (F’23)

Submitted By Zainab Sarfraz (7061)

Submitted To Ma’am Aisha Naseem
Course Principles Of Microeconomics
Date 27th May, 2024
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CHAPTER 22:
“PURE MONOPOLY”

QUESTION 8. Critically evaluate and explain each statement:

PART - A
“Because they can control product price, monopolists are always assured of profitable
production by simply charging the highest price consumers will pay.”
While it is true that monopolists are price makers, the statement insinuates that they are not
bound by economic theories and principles hence it is not entirely true. Even monopolists aim for
an equal point between Marginal Costs and Marginal Revenue (MC=MR). Yes, barriers to entry
do give monopolies an advantage to be making positive profit or at least be at the breaking even
point However, they also need to consider the demand elasticity of their product as well as the
capability of a consumer to make a purchase. If the price is set too high that the majority of the
consumers cannot buy it does not relieve the firm of its average fixed cost, this means that the
monopolistic firm would have more product than total revenue. This is the most undesirable
situation for a monopolistic firm.

b. The pure monopolist seeks the output that will yield the greatest per-unit profit.
The statement is misleading. Greatest per unit profit does not necessarily mean that the total
revenue will also be beneficial to the firm. In any competition economists believe that the
optimal situation is MC equals MR however focusing on per unit profit might not provide this
result this is because maximizing per unit profit does not at all mean that a greater quantity of the
product will be sold, hence it does not account for a greater total revenue.

c. An excess of price over marginal cost is the market’s way of signaling the need for more
production of a good.
This statement is true. The price (P) reflects the value society places on the last item produced.
The marginal cost (MC) represents the value of the resources used to produce that item, which
could have been used for something else. When the price is greater than the marginal cost (P >
MC), it means society values the item more than the cost of the resources used to produce it. This
indicates that increasing production would be beneficial for society, as the value placed on
additional units is higher than the opportunity cost of producing them.

d. The more profitable a firm, the greater its monopoly power.

The statement is correct. The more profitable a firm, the greater its monopoly power because
monopoly power allows firms to set higher prices and restrict output, leading to higher profits.
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Profitable firms can also create barriers to entry (by patents), benefit from economies of scale,
and invest in innovation, reinforcing their market dominance. They can also buy out scarce resou
for their usage only. However, it is worth noting that high profitability can also result from
factors like efficiency and innovation, not just monopoly power.

e. The monopolist has a pricing policy; the competitive producer does not.
A monopolist has a pricing policy because it can set prices due to lack of competition, adjusting
prices to maximize profits. In contrast, a competitive producer does not have this power and
must accept the market price determined by supply and demand, having no control over setting
their product's price.

f. With respect to resource allocation, the interests of the seller and of society coincide in a
purely competitive market but conflict in a monopolized market.
In a purely competitive market, resource allocation is efficient because prices equal marginal
costs (P = MC). This means that producers supply goods at the price consumers are willing to
pay, reflecting the true cost of resources, leading to optimal production and consumption levels.
Here, the interests of sellers (to maximize profit) and society (to maximize welfare) align. In a
monopolized market, however, the monopolist sets prices above marginal costs (P > MC) to
maximize profits, leading to reduced output and higher prices. This results in a deadweight loss,
where resources are not used optimally, and the interests of the monopolist (to maximize profit)
conflict with the interests of society (to maximize welfare and ensure efficient resource
allocation).

g. In a sense the monopolist makes a profit for not producing; the monopolist produces
profit more than it does goods.
In a sense, the monopolist makes a profit by restricting output to keep prices high. Instead of
producing goods efficiently to meet consumer demand, the monopolist limits production to
increase scarcity, which allows them to charge higher prices. This results in higher profits but
fewer goods being produced and sold compared to what would occur in a competitive market.
Essentially, the monopolist's profit comes more from their market power to control supply and
prices than from producing and selling large quantities of goods.
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CHAPTER 21:
“PURE COMPETITION”

QUESTION 04.
a. At a product price of $56, will this firm produce in the short run? Why or why not? If it
is preferable to pro- duce, what will be the profit-maximizing or loss-mini- mizing output?
Explain. What economic profit or loss will the firm realize per unit of output?
Yes it will produce in the short run, $56 exceeds AVC (and ATC) at the loss—minimizing output.
Using the MR=MC rule it will produce 8 units. Profits per unit = $7.87 (= $56 - $48.13); total
profit =$62.96.
b. Answer the relevant questions of 4a assuming product price is $41.
Yes, $41 exceeds AVC at the loss—minimizing output. Using the MR = MC rule it will produce
6 units. Loss per unit or output is $6.50 (= $41 - $47.50). Total loss = $39 (= 6 $6.50), which is
less than its total fixed cost of $60.
c. Answer the relevant questions of 4a assuming product price is $32.
No, because $32 is always less than AVC. If it did produce, its output would be 4—found by
expanding output until MR no longer exceeds MC. By producing 4 units, it would lose $82 [= 4
($32 - $52.50)]. By not producing, it would lose only its total fixed cost of $60.
d. In the table below, complete the short-run supply schedule for the firm (columns 1 and
2) and indicate the profit or loss incurred at each output (column 3).

(I) (II) (III) (IV)

Price Quantity supplied, Profit (+) Quantity Supplied,
Single firm Or Loss (-) 1500 firms

26 $ 0 -60 0

32 0 -60 0

38 5 -55 7,500

41 6 -39 9000

46 7 -8 10,500

56 8 +65 12,000

66 9 +144 13,500
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e. Explain: “That segment of a competitive firm’s marginal cost curve that lies above its
average-variable-cost curve constitutes the short-run supply curve for the firm.” Illustrate
graphically.
The firm will not produce if P < AVC. When P > AVC, the firm will produce in the short run at
the quantity where P (= MR) is equal to its increasing MC. Therefore, the MC curve above the
AVC curve is the firm’s short-run supply curve, it shows the quantity of output the firm will
supply at each price level.

f. Now assume that there are 1500 identical firms in this competitive industry; that is, there
are 1500 firms, each of which has the cost data shown in the table. Complete the industry
supply schedule (column 4).
Done on the table.
g. Suppose the market demand data for the product are as follows:
What will be the equilibrium price? What will be the equilibrium output for the industry?
For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or
contract in the long run?
Equilibrium price = $46; equilibrium output = 10,500. Each firm will produce 7 units. Loss per
unit =$1.14, or $8 per firm. The industry will contract in the long run.