econ help!: how does a monopolist set its price?

Question

thank you!

Answer 1

Since the monopolist is the only producer, she has the opportunity to set her own price. This is unlike perfect competition, where there are thousands of competitors, so no one firm can set the price.

The demand curve tells the monopolist how the price will be related to quantity demand and, therefore, sold!

The monopolist uses the demand curve to find TR (=P*Q) and MR -- the change in revenue when one extra unit is sold.

As in all profit maximization, the firm will then pick the Q that results in MC = MR.

Answer 2

In economics, a firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above the equilibrium price for a good or service without losing profits to competitors. Monopoly profit is a type of economic profit, that is, it is a profit greater than the normal profit that is typical in a perfectly competitive industry.

In a perfectly competitive market, firms are said to be price takers: since a customer can buy widgets from one producer as easily as another, any widget producer on the market faces a horizontal demand curve at the equilibrium price: if the firm tries to sell widgets above the equilibrium price, customers will simply buy their widgets elsewhere and the firm will lose all of their business. (In actual markets, of course, there is never a situation where exactly comparable goods are available just as easily from one firm as from another — the theory of perfect competition is a useful idealized model rather than a naturalistic description.)

By contrast, lack of competition in a market creates a downward sloping demand curve for a monopolist or oligopolist : although they will lose some business by raising prices, they will not lose it all, and it may be more profitable in most situations to sell at a higher price. This does not mean that monopolists are not price takers. It only says that they have the option of being either a "price taker" (at a level of output of their own choosing), or a "quantity taker" (at a price of their own choosing). They can set their own price and accept a level of output determined by the market, or they can set their output quantity and accept the price determined by the market. They cannot set both price and output.

A firm with monopoly power setting prices will typically set price at the profit maximizing level. The most profitable price that they can set is where the optimum output level (where marginal cost (MC) equals marginal revenue (MR) as seen on the diagram below) meets the demand curve. Under normal market conditions for a monopolist, this price will be higher than the equilibrium price (which is the price at which marginal cost for the producer equals marginal benefit for the consumer). In the chart below the shaded area represents the profits of the monopolist. The lower half represents the normal profits that would go to a competitive firm (ignoring output losses). The upper half represent the additional economic profit going to the monopolist.

Answer 3

Since a monopolist faces a downward sloping demand curve, the price at which it sells its output must always be above its marginal revenue. To see this, consider that a one unit increase in output has two effects on revenue. First, revenue increases by the price charged for this additional unit. Second, revenue falls by the amount by which the price had to fall in order to sell this additional unit times the number of units that were previously sold at the old price. Since the sum of these two effects both equals marginal revenue and is less than the price, this establishes that a monopolist's marginal revenue is always less than its price. The remainder of the proff lies in the simple observation that a monopolist could not maximize its profit by setting price, which is greater than marginal revenue, below marginal cost, since doing so would increase cost more than it would increase revenue. QED

Answer 4

If you have a monopoly on a certain item, you will control the cost. If this is an item vital to everyone, you can set the price whatever you want and you will likely get it. This is why in the U.S., we have an anti-monopoly law. Standard Oil was broken into several companies in the 1960's. In the 1980's, the Hunt brothers of Texas tried to corner the market in silver and the price of silver skyrocketed. The price of an item is determined by supply and demand. There is also a factor of the cost of producing the item but you will hear the supply and demand tune more often.

Answer 5

The monopolists demand curve is completely inelastic. Meaning if the product sold is a "normal good" then the price can be as high as the producer wants. But then again it is impossible to have a completely inelastic demand curve because there is only so much money one can spend.

Answer 6

The market sets the price and the monopolist chooses to charge the highest the market will allow.

So yes it chooses to charge the most it possibly can.