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1. Explain why the P = MC rule is the same as the MR = MC...

1. Explain why the P = MC rule is the same as the MR = MC rule for perfectly competitive firms but not for monopolists in the short run. (6)

2. Illustrate the MR = MC rule for a monopoly and show why, over the short run, it will always make economic profit. List at least one reason why economic profit is not necessarily always applicable over the long run. (14)

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Answer #1

Answer a)

Price is equal to marginal cost is akin to marginal revenue is equal to marginal cost for perfect competitive firms, because in the perfect competition Price (AR = MR) Therefore , P= MC is same as MR=MC

AR= MR (AR is also called price)

P= MR

Therefore, MR= MC in perfect competition. It represents in perfect competition demand curve is horizontal line parallel to x axis.

It is not the case in monopoly. In monopoly, P= MC is not same to MR= MC. The reason is in monopoly market demand curve is downward sloping. It represents inverse relation in price and quantity demanded. Hence, MR is not equal to P

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