Describe at least two ways on how monopoly firm can make profit

Answer 1

A monopoly firm can make profit in several ways, including:

1. Price setting: As the sole player in the market, a monopoly has the ability to set the price of its product or service higher than the cost of production. By increasing the price above the production cost, the firm can capture the maximum amount of consumer surplus and generate significant profits. This strategy relies on the customers' lack of alternative options and their willingness to pay a higher price for the product due to its lack of substitutes.

2. Restricting output: Another way a monopoly firm can maximize its profit is by limiting the quantity of goods or services it produces and sells. By restricting output, the firm can effectively create scarcity in the market, increase demand, and charge a higher price. This strategy allows the firm to allocate resources efficiently, reduce production costs, and generate higher profit margins. Additionally, limiting output serves to maintain the firm's dominant position in the market by preventing potential competitors from entering and eroding its market power.