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

Compared with a perfectly competitive industry that has the same cost conditions, a profit-maximising single-price monopolist will normally:

A single-price monopolist produces less and charges more than a competitive industry with the same costs. It stops where marginal revenue equals marginal cost, and marginal revenue lies below price, whereas competitive firms expand until price equals marginal cost.

  1. AProduce a lower output and charge a higher priceCorrect
  2. BProduce a higher output and charge a higher price
  3. CProduce a lower output and charge a lower price
  4. DProduce the same output and charge the same price
  5. Produce a higher output and charge a lower price

Explanation

The monopolist sets MR equal to MC. Because the demand curve slopes downward, MR lies below price, so the output where MR = MC is smaller than the competitive output where P = MC. Price at that smaller output is higher than the competitive price.

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