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Monopoly and Perfect Competition - Essay Example

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1. Monopoly a) Explain using graphs how monopoly is less efficient than perfect competition. [3] Under a standard model, when a monopolistic structure establishes a single price in the market, a lower quantity of goods will be sold at inflated prices. This stands in contrast to perfect competition where more goods are sold at lower prices…
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Monopoly and Perfect Competition
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Monopoly and Perfect Competition

Download file to see previous pages... b) Why is MR less than price in a monopolistic market? [2] In a monopolistic market, the demand curve for the monopolistic business is the market demand curve. Since market demand is not perfectly elastic, the monopolistic demand curve tends to be slopping down. Sales can only be increased in such conditions by lowering the price. MR is typically lower than price for every level except the first, since the lower price affects not just the extra sales but also previous sales. Hence MR tends to decrease, since a monopoly has foregone price for a greater output. c) A recent report shows that cars made in Canada are sold at lower prices in the U.S. Although they do not have a monopoly, how would price discrimination help to explain this. What does it say about Canadian consumers relative to those in the U.S.? [5] Price differentiation tends to exist when identical goods from the same provider are sold at different prices. Typically, price discrimination tends to exist in monopolistic markets or in oligopolistic markets where it is possible to exercise market power. Price discrimination between the Canadian and the American markets indicates that the same provider is selling the same product at two different prices in these markets. Since the cars are priced lower in Canada, it indicates that the car provider experiences greater competition in the Canadian market. This forces the car provider to sell at lower prices overall. In contrast, in the American market, the car provider faces lower competition or perhaps no competition at all and so can sell cars at higher prices. Therefore, Canadian consumers are willing to pay less to buy cars, while American consumers are willing to pay more to get the same cars. This would also indicate that the Canadian car market is in the state of perfect competition, and the American car market that is in the state of monopoly or oligopoly. d) Give an example of a monopoly. Briefly explain whether you believe it should remain as a monopoly or not. Support your answer. [4] Monsanto is a world leader in the commercial seeds market. Furthermore, Monsanto holds a monopoly in certain herbicide brands such as Roundup. This positions Monsanto as a global monopolistic giant that has the market power to alter prices when it feels appropriate. Already Monsanto is being investigated in the United States for breaching antitrust laws. Monopolies such as Monsanto should be broken up, since they cause more harm than good. Monsanto is already responsible for inflating prices in the genetically altered seeds market around the globe. Such practices dissuade the use of such seeds in the long run by farmers around the world, which in turn leads to generally lower agricultural output. Since the market entry barrier is high for industries such as the commercial seeds market and the herbicides market, it is necessary to break up monopolies such as Monsanto. Only such steps can ensure that new market entrants can be introduced to alter the state of competition. 2. Perfect Competition a) Explain three ways in which international currency markets fit our model of perfect competition. Make sure to explain the effect of the assumptions in the currency market. [6] A market could be theorized to have perfect competition when it meets certain conditions. The market has to be so populated with numerous small firms or producers that ...Download file to see next pagesRead More
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