What conditions must exist in order for a pure monopolist to achieve economic profits? Is the profitability of a firm’s operation a good index of the degree of monopoly power it possesses?
What will be an ideal response?
To be profitable the monopolist must produce a price-quantity combination in the elastic segment of its demand curve, and this must also be a position where the total cost does not exceed the total revenue. Pure monopolists that face high costs and weak demand may experience losses in the short run.
Profitability is a good index of the degree of monopoly power, but monopoly power may exist without profitability in the short run. However, monopolies exhibiting a high economic profit probably do have a high degree of monopoly power. They are not subject to the threat of competition from new entrants nor from substitute products. High profits would likely not exist if the firm feared competition. It would either keep its profits down so the industry would not be as attractive to potential competitors, or it would incur additional costs in trying to retain the barriers that gave it the monopoly power.
You might also like to view...
When the IMF requires a country to implement policy changes in order to receive a loan
A) it is called IMF conditionality. B) most countries reject the loans. C) it means that the IMF will lower that country's quota. D) the IMF must be using one of its financing facilities.
The total tariff revenue to the government of an imported good is found by adding the tariff to the quantity of the good imported
a. True b. False Indicate whether the statement is true or false
One of the consequences of allowing wages to fall in the United States has been growing wage inequality.
Answer the following statement true (T) or false (F)
When it is costly or impossible to prevent a person who hasn't paid for a particular good from using it, then that good is classified as being _____
a. excludable b. rival c. non-excludable d. non-rival