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(a) (i) Outline three characteristics of a monopoly firm - Leaving Cert Economics - Question 2 - 2019
Question 2
(a) (i) Outline three characteristics of a monopoly firm. (ii) Explain why some degree of monopoly power must exist for price discrimination to occur. (b) Explain, ... show full transcript
Worked Solution & Example Answer:(a) (i) Outline three characteristics of a monopoly firm - Leaving Cert Economics - Question 2 - 2019
Step 1
Outline three characteristics of a monopoly firm.
Answer
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Sole Supplier: A monopoly firm is the sole supplier in the industry, meaning its output is equal to the industry output, which can result in significant market power.
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Profit Maximization: The firm seeks to maximize profits by producing where marginal cost (MC) equals marginal revenue (MR). In a monopoly, the MR curve lies below the demand curve due to the downward-sloping demand.
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Barriers to Entry: High barriers to entry exist, which prevent other firms from entering the market. These barriers can include high startup costs, stringent regulations, or control over essential resources.
Step 2
Explain why some degree of monopoly power must exist for price discrimination to occur.
Answer
For price discrimination to occur, the firm must have some level of monopoly power, allowing it to set prices above marginal costs. This ability arises from market power where the firm can prevent arbitrage among different consumer groups. Without such power, all consumers would pay the same price, as firms in perfectly competitive markets cannot influence prices due to the presence of many substitutes.
Step 3
Explain, using a clearly labelled diagram, the long-run equilibrium position of a monopoly firm.
Answer
In the long-run equilibrium for a monopoly, the firm produces at a quantity where marginal cost (MC) equals marginal revenue (MR). This is shown on a diagram where the MC curve intersects the MR curve at point 'Q1'. At this output level 'P1', the average cost (AC) may be below the price, indicating supernormal profits (SNP). The diagram reinforces the idea that monopolies can maintain profits in the long run due to barriers preventing new entrants.
Step 4
With reference to the diagram you have drawn in part (b), explain why a firm's demand curve under monopoly differs from a firm's demand curve under perfect competition.
Answer
The demand curve for a monopolistic firm is downward sloping, indicating that to sell more units, the firm must lower the price. In contrast, under perfect competition, each firm is a price taker and faces a perfectly elastic (horizontal) demand curve. This fundamental difference is due to the market structure; monopolies have more control over pricing due to lack of substitutes, while competitive firms are limited by market prices set by supply and demand.
Step 5
State and explain three advantages of large-scale businesses, using examples from the technology industry.
Answer
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Economies of Scale: Large firms like Amazon benefit from economies of scale, where average costs decrease as production increases, allowing for competitive pricing.
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Secure Employment: Large-scale businesses often provide stable jobs with defined roles and career paths, as seen in firms like Facebook, which offers substantial job security.
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Significant Tax Contributions: Large firms contribute significantly to public finances through taxes, helping fund public services. For instance, Apple pays large amounts in corporate tax, which goes toward infrastructure and public services.
Step 6
Outline the possible effects on a monopoly market structure of government regulation to reduce anti-competitive behaviour.
Answer
Government regulation can lead to reduced monopolistic practices, ensuring fair competition. It can impose price controls, preventing excessive pricing. Additionally, regulations may require transparency in operations and promote market entry for new firms, which can decrease the monopolistic power of existing firms. This can ultimately lead to improved consumer choice and lower prices.