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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 costs, a profit-maximising single-price monopolist will typically:

A single-price monopolist typically produces less output at a higher price than a competitive industry. It sets marginal revenue equal to marginal cost, which gives a lower quantity than the competitive price-equals-marginal-cost rule, and demand then supports a higher price, causing deadweight loss.

  1. AProduce more output at a lower price
  2. BProduce less output at a higher priceCorrect
  3. CProduce the same output at a higher price
  4. DProduce less output at the same price
  5. Produce more output at a higher price

Explanation

The monopolist restricts output to where MR = MC, which is below the competitive output where P = MC. Because the demand curve slopes downward, the lower output sells at a higher price, creating a deadweight welfare loss.

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