4.1 Answer the following questions - NSC Economics - Question 4 - 2024 - Paper 2

A monopoly may be unwilling to charge excessively high prices because:

• High prices can significantly reduce the demand for their products, negatively impacting overall sales and revenue.
• Excessively high prices may lead consumers to seek alternatives or substitutes, which can lower the monopolist's market share.
• Regulatory bodies may intervene if prices are deemed unreasonably high, which can threaten the monopoly's stability.

Therefore, maintaining reasonable prices can be crucial for sustaining demand and profitability.

The label for the profit maximizing point in the graph is 'c'.

The curve represented by the letter X is the Long-Run Average Cost (LAC) curve.

The term 'long run' in economics refers to a timeframe in which all factors of production, including capital and labor, can be adjusted. Unlike the short run, where at least one factor is fixed, in the long run, firms can enter or exit the market, and all inputs can be varied to increase efficiency or production.

The position of the marginal revenue (LMR) curve lies below the average revenue (LAR) curve because:

• In a monopoly, to sell additional units, the firm must lower the price on all units sold. This leads to marginal revenue being less than average revenue.
• The difference between the two curves represents the diminishing increments of revenue as output increases, showing that every additional unit sold generates lower revenue than the previous one.

To calculate the profit/loss of the firm, we use the formula:

Where,

• Total Revenue (TR) is given by the price times quantity sold.
• Total Cost (TC) can be calculated from the average cost (AC) times the quantity.

Assuming an average revenue (AR) of R42 at quantity 100 and average cost (AC) of R32 at the same quantity, we get:

• TR = AR × Quantity = R42 × 100 = R4200
• TC = AC × Quantity = R32 × 100 = R3200
• Thus,

The firm makes a profit of R1000.