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

In long-run equilibrium, which statement correctly contrasts a perfectly competitive firm with a profit-maximising monopolist (assuming no regulation)?

The competitive firm sets price equal to marginal cost because its marginal revenue equals price. A monopolist also equates MR with MC, but its MR lies below price, so it charges a price above marginal cost.

  1. AThe competitive firm produces where price equals marginal cost, whereas the monopolist produces where price exceeds marginal costCorrect
  2. BBoth firms produce where price equals marginal cost
  3. CThe monopolist produces where price equals marginal revenue
  4. DThe competitive firm produces where marginal revenue exceeds price
  5. The monopolist produces at the output where average cost is at its minimum

Explanation

Both firms maximise profit where MR = MC. For the price-taking firm MR equals price, so P = MC. For the monopolist the demand curve slopes down, so MR is below price, and at MR = MC the price is above MC.

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