Skip to content

IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly

A monopolist with linear demand has large economies of scale, so its long-run average cost is well below that of small competitive firms. Which statement is correct about a comparison with perfect competition?

Monopoly price can be lower than the competitive price. Large economies of scale lower marginal cost, and if that saving exceeds the markup from restricting output, consumers pay less. A cost advantage can therefore offset the usual monopoly distortion.

  1. AMonopoly price may be lower than the competitive price, because cost savings can outweigh the output restrictionCorrect
  2. BMonopoly price must always exceed the competitive price whatever the costs
  3. CMonopoly produces at the same output as competition because MR equals MC in both
  4. DMonopoly cannot earn supernormal profit in the long run if costs are low
  5. Deadweight loss is always zero for a monopolist with economies of scale

Explanation

If the monopolist's marginal cost is much lower than that of the competitive industry, the price at MR = MC can be below the competitive price. The price above MC still causes some deadweight loss relative to the monopolist's own cost, so the other claims fail. Option 2 ignores the cost difference.

Did you get it right without looking?

One question tells you little. A timed set on Profit maximisation under perfect competition and monopoly shows your real accuracy, how long you take and where you lose marks.

Practise Profit maximisation under perfect competition and monopolyFree diagnostic mock

More Profit maximisation under perfect competition and monopoly questions