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# This activity is preparation for the essay questions on the midterm.Answer the below essay questions with 3 well written paragraphs that FULLY ANSWER THE QUESTION. Do not copy anything directly out of...

This activity is preparation for the essay questions on the midterm.Answer the below essay questions with 3 well written paragraphs that FULLY ANSWER THE QUESTION. Do not copy anything directly out of the textbook or from the internet - that is plagiarism and you will get a zero for the assignment. Each question is 5 points.

Submit your answers to Activity4 in the Assignments Folder, either in the text box or as a Word doc.

Critically evaluate and explain each statement:

1. The more profitable a firm, the greater its monopoly power.

2. With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.

## Solution

Robert answered on Dec 31 2021
1.
The more profitable a firm, the greater its monopoly power.
The monopoly power of a firm can be measured in many ways. These include the Lerner indexthe Rothschild Index, Amoroso–Robinson relation, concentration ratios and Herfindahl Index. The most commonly used index is the Lerner Index. It is given as the (P- MC)/MC =-1/e. Higher is the value of this index greater is the monopoly power of a firm. Its value ranges from infinity (perfect monopoly) to zero (perfect competition). This value, ( as the formula shows) is based on the value of the price elasticity of demand (e). Higher is the elasticity lower is the index. Therefore, one way to measure monopoly power is to look at elasticity value. Profits have no direct link with monopoly power, although higher the monopoly power more is the scope for profits. The actual profits depend on the gap between price and average cost and, price and marginal cost.
Profits are defined as the difference between costs and revenues. They are not linked to elasticity directly, but it is well known that higher monopoly power allows...
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