Answer to Question #67655 in Microeconomics for Justin Naidoo

Question

If Eskom (assumed sole supplier of electricity) is earning economic profits in the short run. Explain using a well labelled diagram how much output Eskom will produce and at what price this output will be sold if Eskom maximises profits.

1.1Explain the implications and short comings of the kinked demand curve in an oligopolistic market.
1.2Using relevant examples differentiate between monopoly and monopolistic competition.

Answer 1

If Eskom (assumed sole supplier of electricity) is earning economic profits in the short run, then Eskom will produce such amount of output, for which MR = MC at the price from the demand curve for this amount of output.
1.1 The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms to a change in its price or another variable.
1.2 There is a monopoly, when we have only one producer, but there is a monopolistic competition, when there is a lot of producers in the market, which produce differentiated products.