Which of the following could explain why a firm is a monopoly?
Which of the following could explain why a firm is a monopoly? Select one or more answers from the choices shown. LO12.2 a. Patents b. Economies of scale c. Inelastic demand d. Government licenses e. Downward sloping market demand
Here is the full solution including the answer and explanation.
a is correct
Patent or patent law protects the right of an inventor that prevents his work from being copied. It also gives the inventor a monopoly power because of his invention if no other firm or individual has the right to produce that particular commodity.
b is correct
In the case of a monopoly, the long-run average cost declines with the increase in its production. Natural monopolies acquire economies of scale since no other firm can enter the industry and compete, so the only firm present in the market produces the entire quantity supplied in the most cost-effective way.
d is correct
Government licensing basically prevents new firms from joining the industry. The consequence of this restriction is an increase in the economic profit of the existing firms in the market. the vice-versa can also be true, any firm that has established itself as a monopoly might grab all the government licenses.
c is incorrect
A monopolist avoids producing in the inelastic zone of the demand curve. Since monopolists are price makers, they would never choose to reduce their prices in order to sell an extra unit of a commodity by producing in the inelastic zone of the demand curve. This would reduce the total revenue of the firm.
e is incorrect
A downward sloping market demand curve, implies an inverse relationship between price and quantity demanded as per the law of demand. It is not the distinguishing feature of a monopoly firm.
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