Question

What happens if a perfectly compettitive industry becomes a monopoly? Answer the question by using graphs.

Answer 1

Answer) perfectly competitive firm charge price equals to marginal cost and monopoly charge price where marginal revenue equals marginal cost. These are profit maximising condition for both markets. Quantity sold in perfect competition is higher at lower price and quantity sold in monopoly is lower at higher price.

Monopoly consumer surplus is shown by CS(M) and producer surplus is shown by PS(M) and deadweight loss is DWL(M). Price and quantity are Pm and Q respectively.

In perfect competition, consumer surplus is shown by CS(PC) and producer surplus is shown by PS (PC).