Homework Question on Incentives and Monopolies
- Please answer these economics question:
- Compare and constrast the incentives and constraints on the actions of management of private business and politicatians and civil servants in government.
- How does the profit maxiizing strategy of the monopolist differ from that of a competitive firm?
- Why do monopolies occur and persist?
- Why do we believe that comopoly is disadvantageous to consumers and society?
- How can we measure the distortions of a specific monopoly?
- What conditions are necessary for price discrimination?
- When is price discrimination not illegal?
Homework Answer on Incentives and Monopolies
The incentives for management of private business are mainly firm growth and profitability; however, they are constrained by the inadequacy of capital and stiff competition. For politicians their main incentive is expanding the budget as much as possible, however, like private business management, their actions are constrained by the limited nature of resources. Finally, civil servants are motivated by job security and financial rewards.however; their actions are constrained by bureaucracy and rules in government.
In the short-run, both firms use the same profit maximization strategy. However, in the long-run, the strategies are different because the demand curve for a competitive company is perfectly elastic.Therefore, in the long-run, a competitive company uses the prevailing market price. On the other hand, a monopolistic sets its own price.
Firstly, the only existing firm owns all of the particular resource barring others from venturing into the industry. Secondly, the government permits and supports the existence of the monopoly by blocking entry of other firms. Similarly, the existing firm enjoys significant economies of scale that prevents other companies from entering the same market because they will not be profitable.