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# Assume that a pure monopolist and a purely competitive firm have the same unit costs.

 ▲ 0 ▼ ♥ 0 Assume that a pure monopolist and a purely competitive firm have the same unit costs. Contrast the two with respect to (a) price, (b) output, (c) profits, (d) allocation of resources, and (e) impact on income transfers. Because both monopolists and competitive firms follow the MC = MR rule in maximizing profits, how do you account for the different results? Why might the costs of a purely competitive firm and those of a monopolist be different? What are the implications of such a cost difference?

a

Explanation
A monopoly is a form of market where a single seller controls the market price and the level of output. They are price-maker, and to sell extra units of output monopolists have to reduce the price.

Pure competition is another form of market where there are many sellers, so no seller can influence the price. They are price takers, they can sell the entire quantity at the prevailing market price and need not reduce its price to sell extra units.

When the cost of production is the same for a monopolist and a perfectly competitive firm, the price set by the monopolist is higher than what the perfectly competitive firm would charge. This is because the price is greater than the marginal revenue for a monopolist, but a competitive firm has to accept the market price, which is equal to MR.

The price charged by the monopolist would be greater than the price charged by the purely competitive firm at the same cost of production.

b
Explanation
A monopoly is a form of market where a single seller controls the market price and the level of output. They are price-maker, and to sell extra units of output monopolists have to reduce the price.

Pure competition is another form of market where there are many sellers, so no seller can influence the price. They are price takers, they can sell the entire quantity at the prevailing market price and need not reduce its price to sell extra units.

When the cost of production is the same for a monopolist and a perfectly competitive firm, the output of the monopolist would be lower than the output of the purely competitive firm. This is because the price set by the monopolist is higher than what the perfectly competitive firm would charge. The price is greater than the marginal revenue for a monopolist, but a competitive firm has to accept the market price, which is equal to MR.

The output of the monopolist would be lower than the output of the purely competitive firm at the same cost of production.

c
Explanation
A monopoly is a form of market where a single seller controls the market price and the level of output. They are price-maker and to sell extra units of output monopolists have to reduce the price.

Pure competition is another form of market where there are many sellers, so no seller can influence the price. They are price takers, they can sell the entire quantity at the prevailing market price and need not reduce its price to sell extra units.

Monopolists earn a higher level of economic profit both in the short run and long run, whereas a purely competitive firm does not earn an economic profit in the short run and long run, since it cannot increase its price.

A purely competitive firm earns only a normal profit in the long run, while a monopolist earns economic profit both in the short run and long run.

d
Explanation
A monopoly is a form of market where a single seller controls the market price and the level of output. They are price makers and to sell extra units of output monopolists have to reduce the price.

Pure competition is another form of market where there are many sellers, so no seller can influence the price. They are price takers, they can sell the entire quantity at the prevailing market price and need not reduce its price to sell extra units.

Resources are under-allocated in the case of a monopolist. They produce less quantity of output and sell at a higher price. Resource allocation is inferior, since it does not produce at the minimum point of ATC nor does it produce at P = MC. Monopolists maximize profit at MR = MC.

Whereas a purely competitive firm would sell at prevailing the market price with proper and full utilization of resources.

There is an under allocation of resources under monopoly and their level of output is not socially optimal. A purely competitive firm produces at a socially optimal level of output.

e
Explanation
A monopoly is a form of market where a single seller controls the market price and the level of output. They are price-maker and to sell extra units of output monopolists have to reduce the price and vice versa.

Pure competition is another form of market where there are many sellers, so no seller can influence the price. They are price takers, they can sell the entire quantity at the prevailing market price, and need not reduce its price to sell extra units.

Income transfer takes place when the transfer of income takes place from consumers to monopoly owners. As a monopolist charges a higher price than a purely competitive firm, it can impose a private tax on consumers. However, no such income transfer takes place in the perfectly competitive market.

In a purely competitive market, there are so many sellers that each seller is very insignificant to control the market price and market output. The supply curve of a purely competitive firm is the horizontal summation of the marginal cost (cost of producing one extra commodity) of all the existing firms in the industry. The equilibrium market supply and market demand determine the purely competitive price and quantity. A seller can sell their total output at the prevailing market price, implying price is equivalent to marginal revenue (revenue earned from selling one extra unit of a commodity).

However, in the case of a monopolist, the price and quantity are determined by the monopolist itself. A monopolist's price is greater than a purely competitive price, so it cannot sell its total output at monopolist price. A monopolist needs to decrease price in order to increase the quantity sold in the market. This implies that the marginal revenue is less than the price, since the price decreases when more units are sold. The price of those units also decreases, which could have been sold at a higher price. Monopolist's price is not determined at the point where MR is equivalent to MC, instead, its price corresponds to a point on the demand curve, which lies above the intersection of MR and MC.

The cost incurred by a purely competitive firm and a monopolist is not the same due to the economies of scale achieved by a single large firm than multiple single firms. For instance, a natural monopoly might be able to attain the least long-run average total cost.

Another implication is X-inefficiency, which occurs due to a lack of competition. Firms can maximize profit when the cost is minimized, but X-inefficiency takes place when a firm produces output at a greater price than it should have been produced. The monopolist's profit gets reduced due to nonproductive costs such as rent-seeking expenditures, advertisements, and political costs.