3) A firm which is the only supplier in an industry is dominating the market through its

market power.
With the help of a diagram, examine how such actions would lead to market failure. (10
marks)

Topic - Monopoly
Solution: Monopoly market is a single seller market. If a single seller is catering to a large set of
consumers, his preference becomes selling with the _highest prices_. When such a situation
happens the consumer surplus tend to fall while the producer surplus increases. Dead weight loss
with this rearrangement keeps on increasing. Hence loss is very high causing market failure.
4) In the supermarket industry firms use cost-based pricing to determine their profit
~margins. Discuss the relationship between mark-up that is set by firms and market share.
Step 1
The relationship between market-up that is set by firms on market share is a direct one. If a firm
sets a higher market-up, it can increase its market share by charging higher prices than its
competitors and attracting more customers. Customers will be willing to pay a premium for a
firm's product if they believe it is of higher quality than its competitors. Conversely, if a firm sets
a lower market-up, it can gain more market share by offering lower prices than its competitors
and attracting more customers. However, setting a lower market-up will also lead to smaller
profit margins as the firm needs to make up the difference in price with lower margins.

Step 2
Explanation:
In the supermarket industry, cost-based pricing is primarily used to determine profit margins.
This means that firms employ a pricing strategy wherein they set their prices based on the cost of
producing and distributing the goods. This approach assumes that customers are willing to pay
the cost of production plus a reasonable profit margin.

The relationship between market-up and market share is a direct one. Market-up is a pricing
strategy wherein a company sets its prices above the cost of production in order to increase its
profit margins. By setting higher prices than its competitors, a company can increase its market
share as customers will be willing to pay a premium for a firm's product if they believe it is of
higher quality than its competitors. On the other hand, if a firm sets a lower market-up, it can
gain more market share by offering lower prices than its competitors and attracting more
customers. However, setting a lower market-up will also lead to smaller profit margins as the
firm needs to make up the difference in price with lower margins.

Overall, it is important for firms to carefully consider the market-up they set in order to achieve
their desired profit margins and market share. If a firm sets a high market-up, it can potentially
increase its profits, but it must also consider the risk of losing customers to competitors offering
lower prices. On the other hand, if a firm sets a lower market-up, it can potentially increase its
market share, but it must also consider the risk of lower profit margins. Therefore, firms must
carefully consider both market-up and market share in order to maximize their profits.

In conclusion, cost-based pricing is a commonly used strategy in the supermarket industry to

determine profit margins. The relationship between market-up and market share is a direct one,
as firms can increase their market share by setting higher prices than their competitors or
increase their market share by setting lower prices than their competitors. Therefore, firms must
carefully consider both market-up and market share in order to maximize their profits.