Author Question: Critically evaluate the following statement. Monopolists are able to pass on the full amount of any ... (Read 121 times)

j.rubin · **on:** Jun 29, 2018

Critically evaluate the following statement. Monopolists are able to pass on the full amount of any increase in their fixed cost to the consumer in the form of higher prices.

What will be an ideal response?

Question 2

Would a profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short run?

What will be an ideal response?

aloop · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

This statement is false. Monopolists, like any firm operating in any other type of industrial structure, maximizes profit where marginal revenue equals marginal cost. Increased fixed costs do not change the point where marginal revenue equals marginal cost. Therefore, the firm will not find it profitable to increase price.

Answer to Question 2

A profit-maximizing firm will continue to operate even if price falls below average cost, as long as price is above average variable cost. This is because, even if price is less than average cost, as long as a part of the fixed cost is covered, it makes sense to continue production since the alternative is to shut down and incur the entire fixed cost. Thus, a profit-maximizing firm will shut down only when price falls below its average variable cost of production in the short run.