he profit-maximization problem for a monopolist differs from that of a competitive firm in which of the following ways?
A. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.
B. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at the point where average revenue exceeds marginal cost.
C. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level of output is smaller than it is for larger levels of output.
D. For a profit-maximizing competitive firm, thinking at the margin is much more important than it is for a profit- maximizing monopolist.
The correct answer and explanation is :
Correct Answer:
C. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level of output is smaller than it is for larger levels of output.
Explanation:
The key difference between a monopolist and a competitive firm lies in their pricing power and marginal revenue behavior. In a perfectly competitive market, firms are price takers, meaning they sell their goods at the market-determined price. This results in marginal revenue (MR) being equal to price (P) for every unit sold. Since price does not change with output in perfect competition, marginal revenue remains constant across all levels of output. Thus, the profit-maximizing condition for a competitive firm is:
[
MR = MC
]
In contrast, a monopolist is a price maker, meaning they face a downward-sloping demand curve. To sell additional units, the monopolist must lower the price, which means that marginal revenue decreases as output increases. This creates a situation where marginal revenue is always lower than price, because when a monopolist lowers the price to sell more, it reduces revenue from the units it was previously selling at a higher price.
At the profit-maximizing level of output, a monopolist still follows the condition:
[
MR = MC
]
However, since MR declines as output increases, the marginal revenue at this point is lower than at higher levels of output (before the firm had to lower prices).
Thus, Option C is correct because it captures the fundamental distinction: in perfect competition, marginal revenue is constant, while in a monopoly, marginal revenue decreases as output increases due to the downward-sloping demand curve.