Essay - This Paper Discusses Profit Maximization of Monopolistic Firm and the...

This paper discusses profit maximization of monopolistic firm and the benefits and disadvantages ***** a monopoly to a consumer.

MONOPOLY

The central theory in all of the profit-maximiz*****g outcomes rests on the idea that marginal revenue should equal marginal cost. The same is true in the case of a firm with ***** power. Before we discuss the profit-maximizing outcomes, it is important to understand what is meant by monopoly and how does ***** affect revenues and costs.

A firm has a monopoly if it ***** the only supplier in the industry of ***** particular product or products. M*****eover there are no close subst*****utes. Therefore the consumers in this market have no choice but to buy from that one firm or not at all. F***** ***** reason, the monopolist is known as a price-maker because it ***** the opportunity ***** set prices at any desired level (Mankiw, 2000). Monopolies occur largely ***** of the existence ***** barriers to entry in a given industry. These b*****rriers include legal barriers (patents and licenses), economic barriers and natural *****. Under ***** restrictions, government allows anyone firm a special right to manufacture or trade that particular product. This happens usually when a firm acquires a p*****tent ***** a ***** right ***** market that particular *****. Also sometimes the government would grant any one organization to dominate an ***** such as a telecom firm that ***** to be the only firm providing telecommunications services. Other barriers include control of a scarce resource or input as in the case of the South Afric***** diamond syndicate. Technical superiority as in ***** case of Microsoft is another barrier for other firms to make and market a similar product. Natural barrier or monopoly exists where an industry in which adv*****tages of large-scale production make it possible f***** a single firm to produce the entire output of the ***** *****t lower average cost than a number ***** ***** each producing a smaller quantity. ***** there are two basic *****s why monopoly may exist. These are ***** to entry, ***** as legal ***** and patents ***** ***** advantages of large-scale operation. With these barriers, the monopolist is able to ***** a level of output that is in accordance with the rule of pr*****it maximizing (Pindyck & Daniel, 2000). The market cannot determine ***** price, which a ***** would charge the way it can for a price-taking competitive *****. However ***** monopol*****t cannot choose both price and the *****. According to the dem***** curve, the higher the price it sets, ***** less ***** can sell. Thus, the standard supply-demand analysis ***** not apply in a monopolized industry. Since the monopolist firm is ***** ***** ***** in th*****t *****, therefore the ***** demand curve is also the demand ***** for that firm's output. Hence in order ***** derive the profit maximization rule from the demand curve, we see that a - bQ (***** inverse demand curve)

And

TR = PxQ = aQ - *****2 (Total Revenue)

And

MR = dTR/dQ = a - 2bQ