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Compare and contrast the profit maximization conditions, price setting rules and quantity optimization conditions of a...

Compare and contrast the profit maximization conditions, price setting rules and quantity optimization conditions of a competitive firm and monopolist firm in a short run (Note: use diagram, equation, examples and economic theory to explain your answer).

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Answer #1

Perfect competitive firm-

A perfect competitive firm will set P=MC for profit maximization and as the firm is a price taker with free entry and exit, it cannot set its own price therefore the demand curve is a horizontal line.

Monopoly firm-

A monopoly firm sets MC=MR for profit maximization and as the firm is a single seller in the market with no free entry, it can sets it's own price therefore the demand curve is downward sloping.

The monopoly produces a lower output than the perfect competitive firm and charges higher price so the total welfare is not maximized in this market whereas total surplus is maximized in perfect competitive market as it produces an efficient quantity.

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