Monopoly

Question 1

Pros of Monopolies (2)

Answer 1

• Able to finance large R&D: as they earn supernormal profits in the long run
• EOS: Lower Av. c could be passed to consumers in the form of lower prices and greater outputs

Question 2

Cons of Monopolies (5)

Answer 2

However,
- Monopolies are not AE nor PE
- Deadweight loss: Underconsumption and underproduction of goods and services that the optimal level of output
- Lost consumer and producer surplus: High prices and low quantities, decreased choices for consumers and producers lose out on extra profits thus, not being able to maximise their profits

Question 3

Evaluate monopolies

Answer 3

• Monopolies can be allocatively efficient but it depends on whether it is a natural monopoly or not
• Is there competition or is there just the threat of competition which could be to just reduce the inefficiencies of the monopoly
• Monopoly may not be profit maximising; their objectives may be to better society, sales maximising or to achieve allocative efficiency
• EOS or DOS depends on the size of the monopoly (worst case scenario - DOS)