6. What is the socially desirable price for a natural monopoly to charge? Why will a natural monopoly that attempts to charge the socially de- sirable price invariably suffer an economic loss? The socially desirable price equals the marginal cost of the product.
What price do monopolies charge?, In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient.
Furthermore, What price should the monopoly charge to maximize profit?, The profit–maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR = MC. If the monopoly produces a lower quantity, then MR > MC at those levels of output, and the firm can make higher profits by expanding output.
Finally, What is the socially efficient number of portraits?, What is the socially efficient number of portraits? The socially efficient number is 8, since each customer has a reservation price that exceeds the marginal cost of production.
Frequently Asked Question:
What is the efficient price in a monopoly?
Efficient pricing of services means the lowest price for an equal quality service. In market economies, a natural monopoly occurs when the most efficient number of firms in the industry is one.
Can a monopoly be efficient?
In a monopoly, the firm will set a specific price for a good that is available to all consumers. … A monopoly is less efficient in total gains from trade than a competitive market. Monopolies can become inefficient and less innovative over time because they do not have to compete with other producers in a marketplace.
Is a single price monopoly efficient?
In perfect competition, the equilibrium quantity , QC, is the efficient quantity because at that quantity, the price PC equals marginal benefit and marginal cost. 3. … In a single–price monopoly, the equilibrium quantity, QM, is inefficient because the price, PM, which equals marginal benefit, exceeds marginal cost.
What does price equal in a monopoly?
In a monopoly, supply decisions need more than just the knowledge of one price. For a firm in competitive market, price equals marginal cost. P = MR = MC. For a monopolist, price exceeds marginal cost.
What price should the firm charge to maximize its profit?
In order to maximize profit, the firm should produce where its marginal revenue and marginal cost are equal. The firm’s marginal cost of production is $20 for each unit. When the firm produces 4 units, its marginal revenue is $20.
How does a monopoly choose the price and quantity to maximize its profits?
A monopolist can determine its profit–maximizing price and quantity by analyzing the marginal revenue and marginal costs of producing an extra unit. … Thus, a profit–maximizing monopoly should follow the rule of producing up to the quantity where marginal revenue is equal to marginal cost—that is, MR = MC.
How do you calculate profit-maximizing price?
Determine marginal cost by taking the derivative of total cost with respect to quantity. Set marginal revenue equal to marginal cost and solve for q. Substituting 2,000 for q in the demand equation enables you to determine price. Thus, the profit–maximizing quantity is 2,000 units and the price is $40 per unit.
Do monopoly firms always apply the profit-maximizing price?
A pure monopoly has the same economic goal of perfectly competitive companies – to maximize profit. If we assume increasing marginal costs and exogenous input prices, the optimal decision for all firms is to equate the marginal cost and marginal revenue of production.
How does a monopoly determine price?
A monopolist can determine its profit-maximizing price and quantity by analyzing the marginal revenue and marginal costs of producing an extra unit. If the marginal revenue exceeds the marginal cost, then the firm should produce the extra unit. … This quantity is easy to identify graphically, where MR and MC intersect.
What price will the monopolist charge to maximize profits?
The profit–maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR = MC. If the monopoly produces a lower quantity, then MR > MC at those levels of output, and the firm can make higher profits by expanding output.
Do monopolies lower prices?
For a monopoly there is a price effect. It must reduce price to sell additional output. So the marginal revenue on its additional unit sold is lower than the price, because it gets less revenue for previous units as well (it has to reduce price to the same amount for all units).
How does a monopoly affect prices?
In a monopoly, the firm will set a specific price for a good that is available to all consumers. The quantity of the good will be less and the price will be higher (this is what makes the good a commodity). The monopoly pricing creates a deadweight loss because the firm forgoes transactions with the consumers.
What happens if a monopoly lowers its price?
If demand is price elastic, a price reduction increases total revenue. To sell an additional unit, a monopoly firm must lower its price. The sale of one more unit will increase revenue because the percentage increase in the quantity demanded exceeds the percentage decrease in the price.
Do Monopolies raise prices?
Monopoly Pricing: Monopolies create prices that are higher, and output that is lower, than perfectly competitive firms.
How do monopolists set prices?
A monopoly price is set by a seller with market power; that is, a seller who can drive up the price by reducing the quantity he sells, as opposed to “perfect competition”, under which sellers simply take the market price as given.
What price will the profit maximizing monopolist charge?
The monopolist will select the profit–maximizing level of output where MR = MC, and then charge the price for that quantity of output as determined by the market demand curve. If that price is above average cost, the monopolist earns positive profits.
What price will this firm charge to maximize profit?
To maximize profits, the firm should set marginal revenue equal to marginal cost. Given the fact that this firm is operating in a competitive market, the market price it faces is equal to marginal revenue. Thus, the firm should set the market price equal to marginal cost to maximize its profits: 9 = 3 + 2q, or q = 3.