Define Monopoly. How does a monopolist fix price for his product?
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monopoly means
1.the control of an industry or service by only one company; a type of goods or a service that is controlled in this way
2.the complete control, possession or use of something; something that belongs to only one person or group and is not shared
Since for a price setting firm this means that a firm with market power will charge a price above marginal costand thus earn a monopoly rent. On the other hand, a competitive firm by definition faces a perfectly elastic demand, hence it believes which means that it sets price equal to marginal cost.
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1.the control of an industry or service by only one company; a type of goods or a service that is controlled in this way
2.the complete control, possession or use of something; something that belongs to only one person or group and is not shared
Since for a price setting firm this means that a firm with market power will charge a price above marginal costand thus earn a monopoly rent. On the other hand, a competitive firm by definition faces a perfectly elastic demand, hence it believes which means that it sets price equal to marginal cost.
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the reciprocal of the price elasticity of demand, Thusthe monopolistic firm chooses thequantity at which the demand pricesatisfies this rule. Since for a pricesetting firm this means that a firm with market power will charge aprice above marginal cost and thus earn a monopoly rent.
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