Author Question: Both competitive firms and monopolies produce at the level where marginal cost equals marginal ... (Read 86 times)

jeatrice · **on:** Jun 29, 2018

Both competitive firms and monopolies produce at the level where marginal cost equals marginal revenue. Then, other things remaining the same, why is price lower in a competitive market than in a monopoly?

What will be an ideal response?

Question 2

What happens to the budget constraint of the recipient when he receives the 100 cash under Plan A? What is likely to happen to his consumption of both food and all other goods if they are both normal goods?

What will be an ideal response?

kjo;oj · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

In both market structures, firms produce the level of output such that marginal cost equals marginal revenue. A firm in a perfectly competitive market faces a perfectly elastic demand curve. As a result, marginal revenue for a competitive firm is equal to price. Therefore when a competitive firm equates marginal revenue and marginal cost it also equates price and marginal cost. For a monopolist, however, marginal revenue is less than marginal cost. A monopolist faces a downward sloping market demand curve. As a consequence a monopolist must reduce price in order to sell an additional unit of its product. Therefore, for a monopolist, marginal revenue is less than price; the difference between price and marginal revenue is the effect of reducing price in order to sell more output. As a result, when a monopolist equates marginal revenue and marginal cost price will be greater than marginal cost (since price is greater than marginal revenue).

Answer to Question 2

The budget constraint will shift out and to the right under the cash plan. His consumption of both goods are likely to rise if they are normal goods.