Figure: Monopoly Profits in Duopoly
(Figure: Monopoly Profits in Duopoly) In the figure Monopoly Profits in Duopoly, each firm faces an identical demand curve, D1, and the market demand curve is D2.The figure illustrates how firms can reap monopoly profits even in an industry with:

Question

Quizplus · Accepted Answer

The figure shows that despite the presence of a second firm, each firm can still charge a high price and earn monopoly profits. This is possible because the firms are interdependent and have to consider the actions of their competitor. Therefore, despite the presence of competition, each firm has some monopoly power. Option A is incorrect because free entry and exit would lead to increased competition and reduced profits in the long run. Option C is incorrect because monopolistic competition involves many firms selling differentiated products, and does not involve monopoly profits. Option D is incorrect because the four-firm concentration ratio is a measure of market concentration and does not necessarily imply monopoly power.