Exam Question # Q.7. What are the two adjustments of Long Period Monopoly Price? Ans. Long-run monopoly adjustments are of two types:

  

1. Single plant and

2. Multi-plant adjustments

1. Single-Plant Adjustment:

If the monopolist operates on a single plant there may exist three possibilities – (i) If in the short-run the monopolist is incurring losses, he may make such adjustments in his plant as to stop losses in the long-run. He may have a less than the optimum size plant in order to earn profits. If he cannot, he will have to stop production altogether (ii) He may have a plant larger than the optimum size.

This plant is, however, of less than the optimum size, for the monopoly firm is not producing at the lowest point of the LAC curve L. It has some excess capacity. It is not in a position to take full advantage of the economies of scale due to the small size of the market for his product.

In the second case the monopolist is in short-run equilibrium where he is maximizing his profits. In the long run, he changes the scale of his plant in order to earn larger profits. Accordingly, he builds the plant by adjusting its scale of plant in the long run, the monopoly firm has been able to sell more at a lower price and earn larger profits than in the short-run.

In the third case, if the monopolist tries to install a plant larger than this optimum scale plant, he will lose instead of gaining more by producing a larger output. The expansion of output beyond the optimum level would lead to diseconomies of production. It implies that producing beyond the optimum output will lead to higher per unit cost.

2. Multi-Plant Adjustments:

A monopolist may operate more than one plant. In the short-run, he can operate any number of plants of the same size or of different sizes. But in the long-run, he operates only those plants which together bring in larger profits. Given each plant of the same size and of identical cost conditions, he will have each plant of that size where the long-run average cost curve LAC and the SAC curve touch each other at their minimum points.

If in the short-run, the monopolist operates four plants, he may reduce them to two in the long-run by employing more efficient plants so that the long-run average and marginal costs are lowered and he earns larger profits. Like the single plant monopoly, the multi-plant monopoly adjustment in the long-run may be followed by quantity and price changes. But in the case of multi-plant monopoly the firm will operate at the minimum long-run average costs to gain maximum profits.