Principles of Microeconomics II Assignment Answer – Ba Prog. Sem. 2 Assignment Answer

Principles of Microeconomics II Assignment Answer: आजके इस आर्टिकल में हम जानने वाले है Sol DU के (Principles of Microeconomics II) के सवाल के जवाब के बारे में, काफी बच्चे अभी भी लगे हुए है Sol DU के असाइनमेंट डाउनलोड करने में, लेकिन सर्वर की दिक्कत की वजह से नहीं हो पा रहा है इस आर्टिकल में आपको मै आपको SOL DU के (Principles of Microeconomics II) के सवाल का जवाब बताने वाला हु, Sol Du Bcom Sem-II Principles of Microeconomics II

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Question 1

Distinguish between Monopoly and Monoopolistic competition market & explain the social cost of monopoly.

Answer

sol du assignment answer

Social Cost of Monopoly: Monopoly and Inefficiency!
An important difference between monopoly and perfect competition is that whereas under perfect competition allocation of resources is optimum and therefore social welfare is maximum, under monopoly resources are misallocated causing loss of social welfare.

When a product is produced and sold under conditions of monopoly, the monopolist gains at the expense of consumers, for they have to pay a price higher than marginal cost of production. This results in loss of consumers’ welfare. Which is greater? Monopolist’s gain or consumers’ loss. To measure welfare gain or loss some economists have used the concept of consumer’s surplus.

Consumer’s surplus, is the surplus of price which consumers are prepared to pay for a commodity over and above what they actually pay for it. The dead-weight loss in consumer’s welfare due to monopoly can be shown through Figure 26.12 where TD is the demand curve for the monopolist product MR is the corresponding marginal revenue curve. It is assumed that the industry is a constant cost industry so that average cost (AC) remains the same as output is increased and marginal cost is equal to it. 

Principles of Microeconomics II Assignment Answer

Under perfect competition firms equate price with marginal cost and industry’s output is determined by demand for and supply of the product. Since we are considering a constant cost industry, a horizontal line (AC=MC) is the supply curve of the industry. It will be seen from Figure 26.12 that under perfect competition price determined is equal to QK (or OP.) and output OQ is being produced. Firms will be equating price oP with their marginal cost. The consumer surplus enjoyed by the consumers is equal to the area TKPc. It may be noted that consumer surplus reflects social welfare as it is excess of what consumers are willing to pay (that is, the utility that they obtain) over and above what they actually pay.

microeconomics diagram

Now, the monopolist would not produce OP-output as he equates marginal revenue (MR) with marginal cost (MC) to maximize his profits. It will be seen from Fig. 26.12 that marginal revenue and marginal cost are equal at output level OM. Therefore the monopolist will produce OM output and charge ML or OPm price. Thus, monopolist has restricted output to OM and raised price to OPm

Principles of Microeconomics II Assignment Answer: As a result monopolist makes profits equal to the area PZLEP.. On the other hand, as a result of rise in price to Pm, the consumers’ surplus has been reduced to the area TLP. and they suffer a loss of consumer surplus equal to the area P.KLPm. Thus there is a redistribution of income from consumers to the monopolist, but it is important to note that loss of consumer surplus P.KLP. Which is greater than the profits made by the monopolist by the area of triangle LKE. 

Principles of Microeconomics II Solved Assignment

The loss in consumer surplus can be divided into two components. First part is the profits equal to the area PMLEP, made by the monopolist at the expense of the consumers. This component of loss in consumer surplus is suffered by those who are still purchasing the product. 

The second component of the loss of consumer surplus is equal to the area of triangle LKE which is due to allocative inefficiency caused by the monopolist by reducing output of the product and raising its price. This second component of loss in consumer surplus as measured by the area of triangle LKE is called dead-weight loss of welfare caused by the monopolist

Ba Assignment Answer Sem-2

This represents social cost of monopoly. It will be seen from Figure 26.12 that price which the last existing consumer is willing to pay for Mth unit is ML while the marginal cost which has to be incurred by the society is ME and therefore from Mth unit, consumer enjoys consumer surplus equal to EL. 

In other words, consumer values the product more than the opportunity cost of production as mcasured by the marginal cost (MC). Likewise, the price which the consumers are willing to pay for additional MQ units exceeds the marginal cost (MC) to the society and therefore generates additional consumer surplus.

Thus, the social welfare or consumer surplus would be increased if output is extended to the point Q. It will be seen from Figure 26.12 that consumers would gain additional consumer surplus equal to the area of triangle LKE if output is increased to OQ.

Sol Du Assignment Answer

But monopolist would not extend output to point Q because his profits are maximised at OM output. Since for extra units from M to Q, marginal cost exceeds marginal revenue of the monopolist, he will not produce them. But from the social point of view, the extension of output to the point Q is desirable as it increases consumer surplus gained by the consumers. 

Principles of Microeconomics II Assignment Answer: Thus, monopoly causes a net loss of consumer welfare equal to area of triangle LKE. This is called a dead weight loss of welfare because though consumers suffer a loss of welfare, no one else, not even monopolist, gains from it. This is loss of welfare caused by allocative inefficiency of the monopoly. 

आशा है कि आप सभी असाइनमेंट अच्छे तरीके से बना रहे है सोशल मीडिया पर थोड़ा प्यार देकर हमारी मदद करे

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It may be noted that the gain of profits by the monopolist equal to the area P.LEP. has been made possible by the loss of consumer surplus of those who are still purchasing the OM quantity of the product

Even if these profits gained by the monopolist are redistributed among the consumers, the loss of consumer surplus represented by the triangle LKE would still remain and would not be eliminated because, as explained above, they have been caused by allocative inefficiency of monopoly. Hence it is appropriate to call it a dead-weight loss of welfare. 

Solved Assignment Answer

With lower production of the product by the monopolist, relatively less resources are allocated to its production. For optimum allocation of resources OQ amount of the product, at which marginal cost equals price should have been produced and resources allocated accordingly. To conclude, monopoly causes misallocation of resources and dead-weight loss of welfare. This is also called social cost of monopoly.

Dead – Weight Loss (Social Cost) under Monopoly in Case of Increasing Marginal Cost:

In our above analysis of dead-weight welfare loss (or, in other words, social cost of monopoly) due to reduction in output and hike in the price by a monopolist as compared to the perfectly competitive equilibrium, it has been assumed that marginal cost curve is a horizontal straight line.

When marginal cost curve is a horizontal straight line, the loss in welfare occurs only in consumer surplus. But when marginal cost curve is rising, the loss in welfare due to reduction in output by the monopolist will occur not only in reduction in consumer surplus but also in producer surplus.

Principles of Microeconomics II Assignment Answer: Producer surplus, it will be recalled, is the total revenue earned over and over all the opportunity costs (explicit and implicit) represented by the marginal cost curve. It may be noted that maximum social welfare or economic efficiency is achieved when the sum of consumer surplus and producer surplus is the maximum.

In a perfectly competitive equilibrium where quantity demanded equals quantity supplied or price equals marginal cost, the sum of consumer surplus and producer surplus is maximum and therefore perfect competition ensures maximum social welfare or economic efficiency. But to maximize profits monopolist does no’ equate price with marginal cost. Instead, he equates marginal revenue with marginal cost and therefore reduces output and raises price and thereby causes loss of welfare. Loss in welfare as measured by the reduction in the sum of consumer surplus and producer surplus is illustrated in Figure

Principles of Microeconomics II Assignment Answer
sol du assignment answers

It will be seen that, under perfect competition, equilibrium will be at point D where price is equal to marginal cost (MC) and OQ output is being produced and Pe price list being charged. Now, if monopoly comes into existence, the monopolist-producer will maximize profits by producing lower output OM and will charge higher price Pm. 

It will be observed that the loss in consumer surplus suffered by the buyers is equal to area P DAPm. Due to the higher price charged by the monopolist, his gain in profits or producer surplus equals the rectangle PBAP.. (It may be noted that this gain in producer surplus by the monopolist occurs at the expense of consumers who suffer a loss in consumer surplus and is equal to the price differential P.-P. or AB multiplied by the monopoly output OM). 

Thus the gain in producer surplus represented by the area P BAP is just a transfer of income from the consumers to the monopolist. Net loss of consumer surplus or welfare is therefore the area of the triangle ABD.

However, in the situation depicted in Figure 26.12(a) where marginal cost is rising, apart from the net loss of consumer surplus, there is also a loss of producer surplus due to reduction in output by OM amount under monopoly. It will be seen from Figure 26.12(a) that under perfect competition with price equal to OP or QD, the extra profits or producer surplus earned over and above the marginal costs in the region of MQ output equals the area BDE which is lost due to the reduction in output equal to QM by the monopolist.

sol du assignment answers 2020

This loss in producer surplus BDE is also a dead weight loss caused by the inefficiency or lower production due to monopoly because this has not benefited any other. Thus, the total dead weight loss of welfare caused by the monopoly is equal to the whole area AED which is the sum of net loss of consumer surplus (ABD) and the loss of producer surplus equal to BDE represents social cost of monopoly.

Principles of Microeconomics II Assignment Answer: It follows from the partial equilibrium approach to the measurement of loss of welfare that monopoly is economically inefficient and causes misallocation of resources as it does not extend production of a product to the level at which the sum of consumer surplus and producer surplus is the maximum. 

Question 3 (A)

Define oligopoly & its features. Discuss the nature of kinked Demand Curve.

Answer 3 (A)

Oligopoly

Oligopoly is a form of imperfect competition and is usually described as the competition among a few. Hence, Oligopoly exists when there are two to ten sellers in a market selling homogeneous or differentiated products. A good example of an Oligopoly is the cold drinks industry. In India, there are a handful of firms who manufacture cold drinks. These firms sell homogeneous as well as differentiated products in the market. 

CHARACTERISTICS/FEATURES 

Interdependence

The interdependence in the decision-making of the few firms that make the industry is the most important characteristic of an oligopolistic market. This is important because, when the competitors are few, if a firm makes a small change in price, output, etc., it can have a direct impact on its rivals.

In retaliation, the competitors might change their own prices, output, etc. too. Hence, it is important for firms to consider the impact of the major decisions they take on the market as well as the other firms in the industry. 

Importance of advertising and selling costs

Due to interdependence, firms have to employ aggressive and defensive marketing techniques to gain a bigger share of the market. Hence, firms incur a lot of costs in marketing and promotional activities. Therefore, in an oligopolistic market, advertising and selling costs have great importance. 

Usually, firms from such a market avoid price cutting and try to compete on the non price factors. If they start under-cutting one another, soon a price-war can emerge, driving some firms out of the market.

Group Behavior

The crux of oligopoly is group behaviour. If an oligopolist assumes profit-maximizing behaviour, then he goes against the fundamentals of an oligopolistic market. 

However, there is no generally accepted theory of group behaviour. Some questions that require answers are:

  • Do the members of a group agree to pull together in the promotion of common interest or do they fight to promote their individual interests?
  •  Does the group have a leader?
  • If yes, how does he get others to follow him?

However, one thing as certain – each firm closely observes the behaviour of other firms in the industry. If then designs its moves based on the observation. 

There is no single theory of oligopoly. The two that are most frequently discussed, however, are the kinked-demand theory and the cartel theory. The kinked-demand theory is illustrated in Figure and applies to oligopolistic markets where each firm sells a differentiated product. According to the kinked-demand theory, each firm will face two market demand curves for its product. At high prices, the firm faces the relatively elastic market demand curve, labeled MD 1 in Figure. 

figure 2
sol du assignment questions and answers

The kinked-demand theory of oligopoly illustrates the high degree of interdependence that exists among the firms that make up an oligopoly. The market demand curve that each oligopolist faces is determined by the output and price decisions of the other firms in the oligopoly; this is the major contribution of the kinked demand theory. 

आशा है कि आप सभी असाइनमेंट अच्छे तरीके से बना रहे है सोशल मीडिया पर थोड़ा प्यार देकर हमारी मदद करे

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Principles of Microeconomics II Assignment Answer: The kinked-demand theory, however, is considered an incomplete theory of oligopoly for several reasons. First, it does not explain how the oligopolist finds the kinked point in its market demand curve. Second, the kinked-demand theory does not allow for the possibility that price increases by one oligopolist are matched by other oligopolists, a practice that has been frequently observed. Finally, the kinked-demand theory does not consider the possibility that oligopolists collude in setting output and price. The possibility of collusive behavior is captured in the alternative theory known as the cartel theory of oligopoly. 

Question 3(B)

Show game theory under oligopolistic market.

Answer 3(B)

Game theory is concerned with predicting the outcome of games of strategy in which the participants (for example two or more businesses competing in a market) have incomplete information about the others’ intentions 

Applying game theory in your economics exams
  • Game theory analysis has direct relevance to the study of the conduct and behaviour of firms in oligopolistic markets – for example the decisions that firms must take over pricing and levels of production, and also how much money to invest in research and development spending.
  • Costly research projects represent a risk for any business – but if one firm invests in R&D, can a rival firm decide not to follow? They might lose the competitive edge in the market and suffer a long term decline in market share and profitability. 
  • The dominant strategy for both firms is probably to go ahead with R&D spending. If they do not and the other firm does, then their profits fall and they lose market share. However, there are only a limited number of patents available to be won and if all of the leading firms in a market spend heavily on R&D, this may ultimately yield a lower total rate of return than if only one firm opts to proceed. 
आशा है कि आप सभी असाइनमेंट अच्छे तरीके से बना रहे है सोशल मीडिया पर थोड़ा प्यार देकर हमारी मदद करे

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