Question

Assume that a pure monopolist and a purely competitive firm have the same unit costs. In this case, determine what is true with respect to (a) price, (b) output, and (c) profits.
1. PMonopoly > PCompetition
2. PMonopoly < PCompetition
3. PMonopoly = PCompetition
4. QMonopoly > QCompetition
5. QMonopoly < QCompetition
6. QMonopoly = QCompetition
7. ProfitMonopoly > ProfitCompetition
8. ProfitMonopoly < ProfitCompetition
9. ProfitMonopoly = ProfitCompetition

a. Which of the combinations above are accurate?

b. Assume that a pure monopolist and a purely competitive firm have the same unit costs. In the case of a pure monopolist, resources will be allocated

c. Even though both monopolists and competitive firms follow the MC = MR rule in maximizing profits, there are differences in the economic outcomes because

d. The costs of a purely competitive firm and a monopoly may be different because

e. If a monopoly can experience economies of scale, it can

Answer 1

Answer:

a. 1, 5 and 7

b. Resources will be allocated inefficiently

c. Differing sizes and capacities

d. Benefits due to economies of scale

e. Reduce prices and improve resource allocation.

Explanation:

The correct combination is 1, 5 and 7. The price of a pure monopoly firm is much higher than that of purely competitive firm because the later is a price taker while the former is a price fixer. Because of this, output of monopoly is lower while the profit margin is higher than that of competitive firm.

Assuming that a pure monopolist and a purely competitive firm have the same unit costs. In the case of a pure monopolist, resources will be allocated inefficiently because the monopolist does not produce at the point of minimum Average Total Cost and does not equate price and Marginal cost.

Even though both monopolists and competitive firms follow the MC = MR rule in maximizing profits, there are differences in the economic outcomes because pure competitors lack capacity and are smaller in size while the monopolist has the capacity to expand inorder to maximize profits.

The costs of a purely competitive firm and a monopoly may be different because the monopolist is capable of taking advantage of cost reduction arising from economics of scale. Pure competitors does not experience economies of scale due to their small sizes.

If a monopoly can experience economies of scale, it can reduce prices beyond that of the pure competitor thereby ensuring a more efficient resource allocation.