Question

Which of the following is true in both a monopoly market and a perfectly competitive market?

	a.	Price is equal to Marginal Cost
	b.	Long-run Profits are always zero
	c.	Price is greater than Average Variable Cost
	d.	None of the above

Answer 1

Asnwer

A firm will produce when he can recover its variable cost i.e. TR > TVC where TR = Total revenue = P*Q, P = price, TVC = Total Variable cost = AVC*Q, AVC = Average Variable cost

So, TR > TC => P*Q > AVC*Q +> P > AVC.

So whatever be the type of market P > ABC other wise firm will shutdown. Hence, option (c) is the correct answer.

A perfect competitive produces that quantity at which P = MC while Monopolist produces that quantity where MR = MC {Here P = price, MC = Marginal cost and MR = Marginal revenue]. Thus option (a) is incorrect

Long run profit of a perfect competitive is always 0 but not for a monopoly. Thus option (c) is also incorrect.

Hence, the correct answer is (c) Price is greater than Average Variable Cost.