Submitted to: Palwinder Kaur

Course No. ECO515

Course Title: Managerial Economics
Class: MBA
Semester 1
Assignment 3

Submitted By

Hemant Dubey

Roll No. B-31

Regi. ID - 11004913
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 :-
Yes, as a consumer I would favor advertising because advertising helps to collect
information about some good brands in a monopolistically competitive market where a large
number of sellers available. Advertising creates a vitriol image of brand in the mind of consumer.
If I would have been a manager, I would still favor advertising. Though advertising
expenses are large, still they are helpful in increasing the sales of product. It causer increasing the
quality of sales of a firm of the demand curve. A firm can attract more customers by advertising
without lowering the price of product.

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.