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

Compared with a perfectly competitive industry with the same cost conditions, a profit-maximising single-price monopoly typically results in which outcome?

A single-price monopoly produces lower output and charges a higher price than a competitive industry. It sets marginal revenue equal to marginal cost, and because marginal revenue lies below price, output is restricted. The higher price at that output causes a deadweight welfare loss.

  1. AHigher output and lower price
  2. BLower output and higher priceCorrect
  3. CLower output and lower price
  4. DHigher output and higher price
  5. Same output but higher price

Explanation

Competitive firms produce where P = MC. The monopolist produces where MR = MC, and since MR is below P, this occurs at a lower output. Price is read from the demand curve at that smaller output, so it is higher. This creates a deadweight loss.

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