Question

20. Which of the following is not a difference between monopolies and perfectly competitive markets? a. Monopolies can earn profits in the long run while perfectly competitive firms break even. b. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost. c. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not. d. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves.

Answer 1

Answer:

The correct answer is option c.

Explanation:

A perfectly competitive market has a large number of buyers and sellers. The firms are price takers and the price is determined by the market forces. Thus the monopoly firms face a horizontal demand curve. This horizontal line represents price, average revenue, and marginal revenue. The equilibrium is obtained where price, (average revenue and marginal revenue) is equal to marginal cost. There is no restriction on entry and exit of firms in the long run. That's why firms face a break-even in the long run.  

While in a monopoly market there is a single firm. This firm fixes price higher than marginal cost. The demand curve of the monopoly is a downward sloping showing relatively elastic demand. A monopoly firm can earn profits in both the short run as well as the long run.