IGCSE Economics 0455: Monopoly Profit, Quality and Choice

Solvex Ltd is the only firm licensed to manufacture a particular type of miniature hearing-aid battery in the country of Amaris, under an exclusive 15-year patent that blocks any other firm from producing an identical battery.

Last year, Solvex sold 500 000 of these batteries at a price of $4.00 each. Its average cost of producing each battery was $3.10.

(a) Define a monopoly market. [2]

(b) Calculate Solvex Ltd's total profit from selling hearing-aid batteries last year. [2]

(c) Explain one way in which the quality or choice available to consumers of hearing-aid batteries might be reduced because Solvex faces no competition. [2]

(d) Explain one way in which Solvex Ltd's high profit from its monopoly position could benefit consumers of hearing-aid batteries in the future. [2]

Part (a): Definition of a monopoly

A monopoly market exists when a single firm is the only supplier in a market, with no close substitutes for consumers to turn to instead. Monopolies are usually protected by a barrier to entry that stops rival firms joining the market, here, Solvex Ltd’s exclusive 15-year patent legally blocks any other firm from producing an identical hearing-aid battery.

Part (b): Calculating profit

Profit is total revenue minus total cost. First, find total revenue from selling 500 000 batteries at $4.00 each:

$\text{Total revenue} = 4.00 \times 500\,000 = 2\,000\,000$

Next, find total cost, using the average cost of $3.10 per battery:

$\text{Total cost} = 3.10 \times 500\,000 = 1\,550\,000$

Subtracting total cost from total revenue:

$\text{Total profit} = 2\,000\,000 - 1\,550\,000 = 450\,000$

So Solvex Ltd’s total profit from selling hearing-aid batteries last year was $450,000.

Part (c): Effect on quality and choice

Because Solvex faces no rival manufacturer, it has little competitive pressure to keep improving its battery’s design, lifespan or performance. A competing firm would normally force it to do this to avoid losing customers. Consumers are also left with no alternative battery to choose instead if they are unhappy with Solvex’s product, since the patent prevents any other firm from making a substitute. Both the quality and the choice available to consumers may therefore be lower than in a market with several competing manufacturers.

Part (d): A possible benefit from monopoly profit

Not every consequence of Solvex’s monopoly position need be negative. Its high, patent-protected profit gives it more money available to invest in research and development than a small firm just breaking even in a competitive market could typically afford. If Solvex uses some of this profit to develop a longer-lasting or more reliable battery, hearing-aid users could eventually benefit from a better product than a less profitable, more competitive industry might have produced.

Final answers

(a) A monopoly market has a single supplier with no close substitutes, usually protected by a barrier to entry.
(b) Total profit $=$ $450,000.
(c) Less competitive pressure may mean lower quality and less choice of battery for consumers.
(d) High monopoly profit could fund research and development that eventually benefits consumers.