Monopoly power refers to the firm’s ability to: (a) Earn economic Prof...
Monopoly power refers to the firm’s ability to:
Earn economic profit:
- Monopoly power allows a firm to earn economic profit by being the sole provider of a product or service in the market.
- With no competition, the firm can set prices higher than its costs, resulting in higher profit margins.
Restrict entry into the industry:
- Monopolistic firms have the ability to restrict or limit the entry of new firms into the industry.
- This can be achieved through various means such as high barriers to entry, control over essential resources, or strong brand recognition.
- By limiting competition, the firm can maintain its monopoly power and continue to earn economic profits.
Set prices above marginal cost:
- Monopolistic firms have the power to set prices above the marginal cost of production.
- Marginal cost refers to the additional cost incurred in producing one additional unit of output.
- By setting prices above marginal cost, the firm can maximize its profit since it can charge a higher price without facing competition.
Possess economies of scale:
- Monopoly power often arises when a firm possesses economies of scale.
- Economies of scale refer to the cost advantages that a firm enjoys as it increases its scale of production.
- With larger scale, the firm can spread its fixed costs over a larger output, resulting in lower average costs.
- This cost advantage makes it difficult for new firms to enter the market and compete effectively, giving the existing firm monopoly power.
Conclusion:
- Monopoly power allows a firm to earn economic profit, restrict entry into the industry, set prices above marginal cost, and possess economies of scale.
- These factors contribute to the firm's ability to maintain its dominant position in the market and enjoy higher profits.
Monopoly power refers to the firm’s ability to: (a) Earn economic Prof...
Option b restrict entry into the industry
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