1)Define monopoly and monopolistic competition, then compare and contrast them.

2)What is a principal-agent problem that may exist in a company? Give one example of this problem in reality. Briefly explain how is this problem addressed in practice? (limit your answer to 200 words)

1)When a single firm completely dominates its market it is called a monopolist and the industry a monopoly. On the other hand, monopolistic competition is seen in markets where there a large number of buyers and sellers with individual firms having only a little control in their own niche.

In the short and the long run, both monopolies and monopolistic competition look to maximize profits. However, only a monopoly is able to earn positive economic profits while monopolistic competitors earn zero economic profits in the long run.

Monopolistic competitors operate as monopolies in their own niches as they are able to exert at least some amount of power in their niche.

The major difference between the two competitions is monopolies have high barriers to entry and exit while monopolistic competition has low barriers.

Both monopolies and monopolistic competition are inefficient in the long run. There is neither allocative nor productive efficiency.

The major difference between the two competitions is monopolies have high barriers to entry and exit while monopolistic competition has low barriers.

While a monopoly faces the market demand curve, monopolistic competitors face individual demand curves. This is because there a lot of firms in the monopolistic competition that dilutes the demand faced by every firm.

Monopolistic competition firms engage in product differentiation to stand out from other firms. Monopolists face no need to differentiate as they do not have any competition.

2)

A common example of the principal-agent problem manifests itself in the relationship between shareholders (owners of a company) and management (agents of the company hired to serve the shareholders' interests). Shareholders expect management to act in a manner that will maximize their return on investment and facilitate the accumulation of wealth. In doing so, they expect management to assume a level of risk that aligns with their tolerance level.

Management, however, may not always act in a way that supports these objectives. Management may make decisions and pursue courses of action that maximize their earnings or lead to greater levels of responsibility. Moreover, they may behave in an overly risk averse fashion (to preserve their status) or in a recklessly (perhaps, overconfidently) risk-seeking fashion (to gain status with a big win).

The best way to address the aforementioned problem is to align management compensation with shareholder success. Additionally, complementing short-term objectives (one year or less) with longer-term goals (2-5 years) would be wise. Finally, shareholders are encouraged to maintain an engaged stance. This is most effectively achieved via a highly competent, diverse, and largely independent board of directors.