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CA Foundation · Business Economics · Price Determination in Different Markets

Compare a perfectly competitive firm and a profit-maximising single-price monopolist facing the same linear market demand and the same constant marginal cost. Which statement is correct?

A monopolist charges a higher price and produces less than the competitive industry. Competition expands output until price equals marginal cost, while the monopolist stops where marginal revenue equals marginal cost. Marginal revenue lies below price, so the monopolist restricts output and sets price above marginal cost.

  1. AMonopolist charges a higher price and produces a lower output than the competitive industryCorrect
  2. BMonopolist charges a lower price and produces a higher output because of economies of scale
  3. CBoth charge the same price but the monopolist earns higher output
  4. DMonopolist charges a higher price and produces a higher output

Explanation

Competitive industry output is where P = MC. The monopolist produces where MR = MC, and since MR lies below demand, price exceeds MC and output is lower. With identical cost and demand there are no scale differences, so the claim of lower price is wrong.

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