How is income distribution affected in monopolies?
The market for fertilizer is perfectly competitive. Firms in the market are producing output, but they are currently making economic losses.
a. How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?
I would think that average total cost and the average variable cost would be greater than the price of fertilizer. The marginal cost would be equal to the price of fertilizer. Is this correct?
c. Assuming there is no change in demand or the firms' cost curves, explain what will happen in the long run to the price of fertilizer, marginal cost, average total cost, the quantity supplied by each firm, and the total quantity supplied to the market.
Is this a monopoly or perfectly competitive firm? I'm confused...
In general, income from monopolies is concentrated in a single or a few individuals.
a) you are correct.
c) in the long run, firms will drop out, causing a decrease in supply. Price will rise. MC=P, so MC rises. Avg cost will probably rise. (But you could describe a situation where total average cost falls.)
marketing
To determine the impact on income distribution in monopolies, we need to understand how monopolies differ from perfectly competitive markets.
In a perfectly competitive market, there are many sellers and buyers, and no single entity has the power to influence the market price. In this scenario, income distribution tends to be relatively equal among firms because competition drives prices down to the level of average total cost (ATC) and average variable cost (AVC) in the long run.
On the other hand, a monopoly occurs when there is a single seller or a dominant firm in the market. In this situation, the monopolistic firm has significant market power and can influence prices, often setting them higher than the equilibrium level found in perfectly competitive markets. As a result, monopolies can lead to income inequality by allowing the monopolistic firm to earn higher profits and concentrate income in the hands of a few individuals.
Now, let's address the questions about the market for fertilizer, assuming it is a perfectly competitive market:
a) In a situation where firms are currently making economic losses, the price of fertilizer is expected to be lower than the average total cost (ATC) and the average variable cost (AVC) but equal to or slightly higher than the marginal cost (MC) of producing fertilizer. This is because, in perfect competition, firms will produce at the level where MC intersects the market demand curve, which determines the price.
c) Assuming no changes in demand or cost curves, in the long run, firms in the fertilizer market will face sustained economic losses and may exit the market. As firms exit, the supply of fertilizer decreases, resulting in a decrease in the quantity supplied by each remaining firm and the total quantity supplied to the market. This reduction in supply, combined with constant or potentially increasing demand, causes the price of fertilizer to rise. Additionally, as the market adjusts, the marginal cost (MC) is likely to increase, and the average total cost (ATC) may also rise due to economies of scale no longer being available with fewer firms in the market. However, it is also possible to describe a situation where total average cost falls if the remaining firms can achieve greater efficiencies with the reduced competition.
In summary, income distribution in monopolies tends to concentrate wealth in a few individuals, while in perfectly competitive markets, income is more evenly distributed among firms. Monopolies can charge higher prices, resulting in higher profits for the monopolistic firm and unequal income distribution.