NAME:ABDUL RASOOL KHAN

MBA1st
ROLL NO.:B28
REGD NO.;1100364
SUBMITTED TO:DR. MANPREET KAUR

Question 1:- Comment on the following statements, giving logical reasoning-

a. The cross-elasticity of demand between the product of the
monopolist and the product of any other producer must be very high.
b. In case of monopoly, the marginal revenue is less than the price.
c. In the short-run, a monopolist cannot be in equilibrium if MC
cuts the MR curve from below, even if MC=MR.
d. Monopoly represents an inefficient use of resources at the macro
level.

Solution:-
a. The cross-elasticity of demand will not be applicable in case of a monopoly.
This is because normally in a monopoly no other producer or seller can enter. In
case the monopoly is not a legal monopoly and is driven by some other factor,
some other players can enter the market. In that case if the new player is able to
with stand the force of competition by the original firm, there may be cross
elasticity of demand between two but in that case it will not be a monopoly.

Solution:-
b. In case of monopoly, producer loss sellers can sell more products only if he
will reduce the price of product. Price for a particular quantity of product is same
as average revenue of that product. Now addition to the total revenue that will
result from the selling of one addition unit of product will be less than the price
firm will revive for that unit. Hence in monopoly, the MR would be less than the
price.

AR and MR curve of a Monopoly Firm

Solution:-
c. If in short run for a monopolist firm MC is equal to MR and MC cost MR
from below, it will be in equilibrium for sure. This is because when MC cost MR
from below and MC=MR, that point is called equilibrium point or point when
profit is maximum. This is possible is all the market conditions.

Solution:-
d. Many economists exclude monopoly from the good economic practice
because in monopoly a firm produces at less than optimum level and therefore
there is always a scope of excess capacity of production in case of monopoly.
This gap is the original level of production and the optimum level of production
leads to economic inefficiency as it neither adds to seller’s profit nor to the
consumer surplus.
Question 2:- Draw a diagram depicting loss to a competitive firm in the short period.
Also compare the social benefits under monopoly and perfect competition with a
diagram?

Solution:- Losses in the short period:-

Social Benefits-Perfect Competition and Monopoly
In perfect competition price of product
is determined by industry according to equilibrium point of demand and supply. The demand
curve is highly elastic in this case. So consumers have a benefit that no firm can change more
prices.
While in monopoly a firm(or industry) can change whatever price it wants. Though it can
unleash the price as it wants, still it has control over the prices of industry. So consumers are at
the loss here because in monopoly firm produces at less than optimum level and change higher
price.
Question 3:- Consider the following table and locate the profit maximizing level of
output. Also estimate the “degree of monopoly” corresponding to that level of output

Output Price Average Cost

1 5 3

2 4 3
 3 3 3

4 2 3

5 1 3

Solution:-

Outpu Pric T T M M A
t e AC C R C R R
1 5 3 3 5 3 5 5
2 4 3 6 8 3 3 4
3 3 3 9 9 3 1 3
4 2 3 12 8 3 -1 2
5 1 3 15 5 3 -3 1

Question 4:- Comment on the following statement with logical reasoning:

A firm in the long-run under monopolistic competition earns only normal

profits like that in perfect competition but only the price is higher and output lower.

Solution :-
 This is true that a firm in long rum under monopolistic competition earns only
normal profit like that is perfect competition, only difference being that the price is higher and
output lower in monopoly competition. This is because perfect competition has a horizontal
demand curve (Dpc) change firm under perfect competition will produce any output at price pc.
But monopolistically competition firm has a downward sloping curve. So it will produce less at
higher price as compared to a firm operating under perfect competition.

Question 5:- The kink demand curve theory explains why a price once determined
would remain sticky but does not determine that price level. Comment.

Solution:- kink demand curve is based upon two basic assumptions:-

1) If a firm increases its price other will not follow.

2) If a firm decreases its price other will also do the same.

In oligopoly, the firm has no option to sell its goods at the current price only. If trice to
decrease its price its price to create more demand, two things can happen either the rival
firms will do the same and the sales will not increase accordingly or the firm may get into
loss due to substitution effect.
Kink demand curve just shows the righty of price and interdependent decision making in
oligopoly but it does not have any tool to determine the price which should be agreed open by
firms.
Question 6:- Comment on the following statements with logical reasoning and
appropriate diagrams.
a) In oligopoly, there is no one single determinate solution, but a number of
determinate solutions depending upon different assumptions.
b) The success of price leadership of a firm depends upon the correctness of his
estimates about the reactions of his followers.

Solution a):- In oligopoly we have indeterminate demand curve. There can be two demand
curves; one can be highly elastic and other can be less elastic. There can be two assumptions
basically in accordance with the increase in price of product by one firm:-

1. Rival firm may increase the price.

2. Rival firm may not react to change in price.
Variations in Demand due to different assumptions

Solution b):- price leadership is when the new entrants or other firms selling products in same
category agree to sell their product at the same price as determined by existing large firm. A
dominate firm (which decides the price) sets price at such a rate that even the small firms and
those producing at a higher cost of production can even some profit. The good margins and also
maintain their market leadership. So the dominant firm anticipates the market conditions and also
the profit margins such that even the smallest of the firms can earn profits.

Question 7:- A city has only one furniture store. Is it likely that the store could
successfully practice price discrimination? Why or why not?

Solution :-
As the city has only one furniture store, the store will have monopoly in the city. But the
market in a city is unlikely to the separated. For practicing price discrimination division of markets
should be there. In these divided markets elasticity of demand needs to be different. But as it is
clear from this case, the only furniture store of the city cannot practice price discrimination due to
absence of market separation.

Question 8:- Is persistent dumping beneficial for the country? Why do countries resort
to dumping?
Solution :-
Dumping is beneficial for a country because it helps in keeping domestic price at a
optimum level but excess of dumping may cause rise of inflation in a country normally such a
condition does not arise in case of countries resorting dumping.
Countries resort to dumping because dumping allows exporting bulk of production at a
price below the domestic price. It is a bind of predatory pricing aimed at disposing off excess
inventory in order to avoid reduction in home price or to gain monopoly in the foreign market.

Question 9:- “Classification of markets is based on their characteristics.” Substantiate

this statement with reference to Monopoly and Oligopoly market structures.

Solution :-
Identification of the types of markets can be done on the basis of their features. Various
features are assigned to different types of markets. Various features to distinguish between
monopoly and oligopoly market structures are :-
MONOPO
Particulars OLIGOPOLY LY
Numbers of
sellers Few sellers Single sellers
May be
hetrogenws or
Products homogeneous Single product
NO legal barrios
but economic
barrios can be
Entry barriers present. Restricted entry
Decision interdependent independent
making decision making decision making
Firm and No. difference
Film and industry are between firm
industry different and undustry

Question 10:- McDonalds is a leading fast food chain giant of USA enjoying international
market also. If it is charging high price at home and low price in foreign market, it is
practicising price-discrimination. If McDonalds is enjoying monopoly at home, then how it
will determine price and output for domestic and foreign market? Explain and Draw a suitable
diagram also.

Solution :-
Where price discrimination is practiced by a sells, the price is different market is
determined by the firm according to the elasticity of demand of two markets. An equilibrium
point is living decided by the firm in the total market which decodes the prime in two markets
where price discrimination is living practiced.

Question 11:- It is said that a monopolist has full control over output and price .In spite
of that why does even a monopolist firm have to depend upon the demand curve for
price determination?

Solution :-
Even in the case of monopoly a firm would want to maximize its profit. To maximize
its profit. It has to go along with the role MC=MR and MC cuts MR from below. A company
which is practicing price discrimination will first decide the price based upon profit
maximization point of the total market. Once the output is determined, the firm would distrileote
as much output in each market as corresponding to point where MC is equal to MR in each
market. If the firm will start changing price randomly without of the different markets, it will not
be able to maximize the profit.

Question 12:- Grocery stores and gasoline stations in a large city would appear to be
examples of competitive markets .There are numerous relatively small sellers, each
seller is a price taker and products are quite similar.
a) How could we argue that these markets are not competitive?
b) Could each firm face a demand curve that is not perfectly elastic?

Solution a):-
The above stated markets do not sum to be competitive as these sells are just price
tables, not price markets. More over products are quite similar. Advertising is very unlikely to the
present is that small scale of bossiness. So these sells do not have much have to attract new
customers. So we can say that these markets are not competitive.

Solution b):-
No, these firms cannot have demand curve which is not perfectly classic.
Because products are quite similar and there are large numbers of sellers. So customers
can cozily shift from one seller to another . So these firms cannot have demand curve
which are not perfectly elastic.