Question

Problem 27 (1 point) Describe the difference between a monopoly market and a monopolistically compet- itive market.

Problem 28 (1 point) In the case of a negative externality, will the social marginal cost be lower or higher than the private marginal cost?

Answer 1

one of the major difference between monopoly and monopolistic competitive market is the ability of the Monopoly to sustain its profit even in the long run. Monopolistically competitive markets have free entry and exit of firms in the long run due to which there are no economic profits in the long run. Monopoly prevents entry of new firms in the long run and therefore it can enjoy long run economic profit

Social marginal cost will be greater than the private marginal cost because the negative externality imposes an marginal external cost on the society which is not internalized by the market participants. this implies that social marginal cost will be the sum of private marginal cost and the marginal external cost.