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Monopoly and monopolistic competition

1) Are monopolists guaranteed of making economic profits?

2) Explain the long run equilibrium situation for a monopolistically competitive industry. Give two examples of industries that fit under this category.

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1) Are monopolists guaranteed of making economic profits?
Yes. In the absence of any competitor consumers are left with no choice but to purchase whatever the monopolist would sell. Quality of the product or service is not a question in a monopolistic market. The consumer's decision is either "take it or leave it".

But the monopolist cannot charge any price they like. It is true that a firm with monopoly has price-setting power and will look to earn high levels of profit. However the firm is constrained by the position of its demand curve. Ultimately a monopoly cannot charge a price that the consumers in the market cannot afford.

Reference: Tutor2U, "Output under a pure monopoly". Accessed March 27, 2011.

2. Monopolistic Competition, Long-run equilibrium conditions:

The long-run equilibrium of monopolistically competitive industry generates six specific equilibrium conditions: (1) economic inefficiency (P > MC), (2) profit maximization (MR = MC), (3) market control (P = AR > MR), (4) breakeven output (P = AR = ATC), (5) excess capacity (ATC > MC), and (6) economies of scale (LRAC > LRMC).

Let us examine these conditions.

(1) economic inefficiency

The condition that price is greater marginal cost (P = MC) means that production does NOT achieve economic efficiency. This means that resources are not being used to produce goods that generate the greatest possible level of satisfaction.

In long-run equilibrium the sandwich price is $4.95 but the marginal cost of sandwich production is $4.65.

* From the buyers viewpoint, this $4.95 price means that they receive $4.95 worth of satisfaction from consuming a sandwich. If buyers did not enjoy $4.95 worth of satisfaction, then they are not willing to pay $4.95. As ...

Solution Summary

Monopoly and monopolistic competitive industry with examples of industries under monopolistic competition.