Principles of Microeconomics, 7th Edition

Published by South-Western College
ISBN 10: 128516590X
ISBN 13: 978-1-28516-590-5

Chapter 15 - Part V - Monopoly - Questions for Review - Page 323: 8

Answer

The first problem is related to the declining average total cost that monopolies have. For the average total cost to be declining, the marginal cost must be lower than the average total cost. Because the price would be lower than the average total cost, then the monopolies would lose money if the price equals marginal cost. The second problem arises because if the price equals the marginal cost, then the owners of the monopolistic firm would have no incentive to reduce their costs. They do try to reduce costs in order to increase profits, however, if the price of the product would equal the marginal costs, they wouldn't have the incentive to reduce costs anymore.
Update this answer!

You can help us out by revising, improving and updating this answer.

Update this answer

After you claim an answer you’ll have 24 hours to send in a draft. An editor will review the submission and either publish your submission or provide feedback.