a) Describe the characteristics of monopoly.

b) What is the marginal cost of a firm operating in a perfectly competitive market if it charges the price of $15 per unit at the profit maximizing output of 5000 units per week?

c) Consider the situation for a firm, at the profit maximizing level of output: price is $50, average total cost (ATC) is $55, and average variable cost (AVC) is $45. Should the firm continue operating in the short run? Explain.

Question a

Characteristics of monopoly.

1. The monopoly market structure is characterized by having a single seller who sells and provides services to many buyers.

2. Higher entry barriers meaning that it is difficult for other sellers to enter the market. The barriers are attributed to the monopoly's ability to control of key resources, economies of scale and also legal barriers that are set

3. The monopoly is a price maker as it determines the price to charge for a good or service as there is no competition. This is different from the perfect competition where prices are determined by the forces of supply and demand

4. The monopoly produces unique products that do not have substitutes in the market.

5. The monopoly is a profit maximizer in that it charges prices that are above those that can be charged in perfect competition meaning it makes super normal profits.

Question b

Price = $15

Profit maximizing output = 5,000 units

The profit maximization condition is Marginal revenue = Marginal cost. Under perfect competition, the price of a product is equal to the marginal revenue which is equal to the marginal cost;

P = MR = $15

MR = MC = $15

Question c

Price = $50

Average total cost (ATC) = $55

Average variable cost (AVC) = $45.

P > AVC but P < ATC

The firm should continue to operate in the short run. In perfect competition, in the short run a firm will produce as long as price greater than average variable cost (P > AVC). However, if the firm's price is less that the average variable cost, (P < AVC) then the firm should shut down.