Question

1) For each question below, compare perfect competition vs monopoly with a constant marginal cost;

a)Explain and show how each firm determines its own demand curve and compare the shape or slope of their demand curve and marginal revenue curve.

b) Explain show and contrast how each type of the firm determines the profit maximizing price and quantity and also compare the resulting market equilibrium price and quantity.

c) Show and compare the markets producers’ surplus, consumer surplus and deadweight loss?

d) Explain and contrast the resulting firm’s long run profit when each market undergoes a permanent increase in demand.

Answer 1

A) Monopolist demand curve is downward sloping while that of the competitive firm is horizontal at market fixed price. Monopolist MR curve is also downward sloping and lies below demand curve while competitive MR = Demand curve.

b. Profit maximize for both at MC=MR. Monopolist P = Pm and Q is Qm (from the graph). Competitive price is Q and quantity is Qp.

c. Graph

d. Increase in demand increases the price in both cases but monopolist will reap profits (P > AC) out of it while competitive firm earns zero economic profit in long run as P = AC,