Question

If the monopolist firm of Exercise 3, was a public sector firm. The government set a rule for its manager to accept the government fixed price as given (i.e. to be a price taker and therefore behave as a firm in a perfectly competitive market), and the government decide to set the price so that demand and supply in the market are equal. What would be the equilibrium price, quantity and profit in this case?

Answer 1

If the government sets a rule for the public sector firm to accept the fixed price, then, the monopoly firm will have to behave like a perfectly competitive firm and will be a price taker. In this case, the price fixed (P^e), as set by the government, will equate the demand and the supply, which will determine the equilibrium point ‘E’. At the price P^e, the firm earns normal profit, i.e. zero economic profit.

Equilibrium price = P^e (fixed by the government)

Equilibrium quantity = Q^e

Profit = Normal profit