Which of the following is least relevant when explaining why monopoly firms can earn positive economic profits over the long term?
A) The ability to use price discrimination. (correct answer)
B) The existence of economies of scale.
C) Control over production input resources.
I chose C but don’t understand how A is correct. Wouldn’t the ability for monopolies to price discriminate be relevant to their ability to earn long term economic profits?
B and C are the obvious ones though. Due to the high barriers to entry such as economies of scale and resources control.
Why?
Economies of scale: the monopoly exists as one firm can produce enough for the mkt at a lower per unit cost. If a new firm tries to enter into the mkt, it will face the higher avg costs to produce due to a smaller scale of operation.
Resources Control: this can occur when one firm is able to control the inputs or resources. Therefore, they should be able to control the mkt.
Because of these barriers, it allows economic profits to persist.
Price discrimination: certain conditions must hold for the firm to charge different prices for the same product, such as the differences in price elasticity of demand and prevention of consumer switching.
However, to ans this kind of question, try to eliminate the obvious ones first and you will be left with the correct one.