Econs

Explain how, in economic theory, a monopolist would determine the price that would maximise profits.

b) To what extent do profits influence the behaviour of the monopolist? [15]

Introduction :

- define a monopoly

- define profits

Development :

- explain profit maximizing conditions (MC = MR; MC cuts MR from below) with aid of diagram

Conclusion:

- The significance that profits have on the behaviour of the monopolist may be different depending on the nature of the

industry as well as the type of setup the monopolist.

Part (b)

Profits influence the level of output and pricing decision of the monopolist.

A monopolist can decide on either the quantity it wishes to sell or the price it wishes to sell the good at.

Monopolist is a price setter

Compared to a more competitive market, this price is higher and the output level of the monopolist lower

The price which the monopolist charges is higher than the marginal cost of the last unit of the good produced and so

a profit maximizing monopolist does not achieve allocative efficiency.

Profits encourage the firm to practice price discrimination

Profits encourage the firm to undertake R&D

In reality, the behaviour of the monopolist may be influenced to a greater degree by the nature of the industry it

operates in than the profit level per se.

1. Contestability

In a market that is highly contestable, the monopolist would choose not to price the good at the profit maximizing level to

pre-empt the potential threat

2. Nature of good sold

Besides the threat of potential entrants, a monopolist may sometimes behave in a more competitive manner in that prices

charged are not necessarily as high due to the fact that they want to avoid unnecessary government intervention. This is

especially so for monopolist which sells goods which are deemed as necessity e.g. public utilities,

The setup of the firm may affect the level of influence profits has on the behaviour of the firm

JC2 H2 Economics (9732)...