Question

Explain in detail how the monopoly ferry operator in Onus will determine the price she will charge the island residents for ferry service and how that price will differ from the price experienced by the island residents and tourists in the perfectly competitive market of Yuri

Answer 1

Answer:

Price Determination in a Monopoly and a Perfectly Competitive Market:

The monopoly ferry operator in Onus will arbitrarily fix any price she likes to maximize revenue and profits.  The prices for her services are not determined by the market forces of supply and demand.

On the other hand, in the perfectly competitive market of Yuri, the ferry operator as a single person cannot fix prices for her services.  Instead, the operator is a price-taker.  The prices of her services are determined by the forces of supply and demand.

Explanation:

Firms in a monopolistic market usually set their prices above the marginal costs of their products and services.  They also earn positive economic profits.  For firms in a perfectly competitive market, an equilibrium is usually achieved where the price and the quantity of a good are determined by market forces, such that price equals marginal cost.  Each firm, therefore, does not earn any positive economic profit.