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Monopolies and perfectly competitive firms maximize profits by producing the output where MR = MC. Since...

Monopolies and perfectly competitive firms maximize profits by producing the output where MR = MC. Since both use the same rule why is it that in perfect competition, P=MC, at this profit maximizing output but in monopoly P>MC?

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Answer #1

As we know, in perfect competition, there is a large number of firms selling the same product and no firm has control over the prices because firms do not enjoy the market power in the perfect competition as prices are set by the industry, therefore, price is equal to marginal revenue and marginal cost i.e. P = MR = MC. On the other hand, a monopoly is a single seller to the market and a monopoly has a full control over the market which enables a monopolist to charge the price greater than the marginal cost, therefore, in monopoly market price and marginal revenue are different because a monopolist sells more quantity by reducing the price of the product and firms under perfect competition cannot reduce the price below marginal cost because they will incur the loss.

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