Question

QUESTION 9 Is the profit-maximizing price and output of a monopoly the same as those of a perfectly competitive market? If diferent, how is it different? T- E 3(12pt) TTT Arial Words 0 Path: p QUESTION 10 Why does a monopoly result in both productive and alocative inefficiency? T TT Arial T IE 3 (12pt) Words 0

Answer 1

Answer

Question 9

The profit maximizing price and output in monopoly are different than the profit maximizing price and output in perfect competition. The monopolist is a price maker of its product, whereas a firm under perfect competition is a price taker in the market. In the short-run , even if the monopolist earns losses, in the long-run the monopolist earns a super normal profit. A perfectly competitive firm in the long-run earns a normal or 'zero' profit, i.e., firm's average cost of production becomes equal to the market price.

The monopolist produces less than a perfectly competitive firm but charges higher price in the market than a perfectly competitive firm gets for its product. It is clear in the following figure.

In the above figure, quantity is measured on the horizontal axis, and the price and costs are measured on the vertical axis. The figure shows the equilibrium position of both a monopoly firm and a perfectly competitive firm in long-run. The MC, and AC curves are the marginal cost , and average cost curves. Both the monopoly and the perfectly competitive firm face the cost structure and their marginal cost (MC) and average cost (AC) are same.

Prices AL -MR=AR=P SAREDM | YMRM

At the given price in the market, the perfectly competitive firm can sell any amount of output it wishes to sell. But the profit maximizing firm under perfect competition produces the output where marginal cost cuts the MR curve.The marginal revenue(MR) curve, and the average revenue(AR) curve in perfectly competitive market are same and horizontal, that coincides with the demand curve of the firm's product. The MR (change in total revenue due to change in one unit of output) in perfectly competitive market equals the price (P). The average revenue (total revenue per unit of output) in perfectly competitive market is also equals the price.In the long run, the firm produces the output at which, the AC equals the price.In the above figure, at P_C competitive price, the firm produces Q_C amount of output in long-run.

In the above figure, the monopolist's demand curve is D_M , which is also its average revenue curve AR_M.. The monopolist's marginal revenue curve is MR_M. The profit maximizing monopolist produces the output at which MC = MR. Thus the monopolist produces Q_M amount of output and charges P_M price.. We see here that the monopoly firm's output is less than the perfectly competitive firm's output by the amount 'Q_MQ_C', and the monopoly charges higher price than the price in competitive market (P_M > P_C). For Q_M amount of output, the average cost of production of the monopolist is AC_{M ,} and the monopolist earns a long-run profit that is shown by the area of the yellow shaded rectangle.

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Question 10

The monopolist produces less than the perfectly competitive firm. The productive efficiency is achieved when the firm produces the output at the point where marginal cost equals the minimum average cost. We see that the monopoly firm produces less than this output. This causes the productive inefficiency.

The allocative efficiency is related to the price the monopolist charges, which is not affordable to all. If the price of the monopoly product and the marginal cost (MC) of production are equal, then it is called the allocative efficiency. We see that the monopolist charges the price which is greater than MC.

Also, as the monopolists are high profit achiever and thus charges high price, so the producer surplus is higher than in competitive market, but the consumer surplus is lower than the perfectly competitive market.Thus arises the allocative inefficiency. Also the resources are not utilized in a way so that the production is maximized.

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