Which of the following statements is inaccurate?
A. Perfectly competitive firms cannot earn economic profits in the long-run; Monopolists can earn economic profits in the long-run.
B. Perfectly competitive firms set a price equal to marginal cost; Monopolists set a price above marginal cost.
C. Perfectly competitive firms face low barriers to entry; Monopolists face high barriers to entry.
D. Perfectly competitive firms do not maximize profits; Monopolists do maximize profits.
The correct answer and explanation is:
The inaccurate statement is D. Perfectly competitive firms do not maximize profits; Monopolists do maximize profits.
Explanation:
Perfectly competitive firms, like monopolists, aim to maximize profits. The key difference lies in how these two types of firms achieve this objective and the conditions under which they operate. Both types of firms will adjust their output and pricing strategy to maximize profits, but the market structures they face are different.
- Perfectly competitive firms operate in a market where there are many firms selling identical products, and no single firm can influence the market price. The price is determined by supply and demand. In the short run, perfectly competitive firms can earn economic profits or losses, but in the long run, economic profits are driven to zero because of the free entry and exit of firms. Firms will enter the market if there are profits, and exit if there are losses, leading to a situation where firms produce at the point where price equals marginal cost (P = MC), which is also where they maximize profit in the long run.
- Monopolists, on the other hand, are the sole producers in their market. Since they are the only supplier, they have the ability to set prices above marginal cost, leading to the potential for long-term economic profits. Monopolists can restrict output to raise prices, maximizing their profits by producing at the point where marginal revenue equals marginal cost (MR = MC), but this occurs at a higher price and lower quantity than in a competitive market.
In both cases, the goal is to maximize profits, but the monopolist has more control over the market price and can sustain profits in the long run due to barriers to entry that prevent other firms from entering the market. The misconception in statement D is that perfectly competitive firms do not aim to maximize profits, which is not true; they do so in a different way than monopolists.