Author Question: Why would a profit maximizing monopolist in a contestable market set its price at a level below that ... (Read 91 times)

faduma · **on:** Jun 29, 2018

Why would a profit maximizing monopolist in a contestable market set its price at a level below that which maximizes short run profits?

What will be an ideal response?

Question 2

Diminishing marginal utility means a downward sloping total utility curve. True or false? Explain.

Indicate whether the statement is true or false

frejo · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

A firm in a contestable market is not protected by barriers to entry. Thus while it is currently the only firm in the market, it might worry that other firms will enter the market. In this case, setting a relatively lower price is known as limit pricing. It is a pricing strategy that deters entry by sending a signal to potential entrants that entering the industry would result in economic losses.

Answer to Question 2

False. Diminishing marginal utility means a downward sloping marginal utility curve. A total utility curve stays upward-sloping as long as marginal utility is positive.