In comparison to a monopoly firm’s profit-maximizing level of price and output, the perfectly competitive industry’s:
A price is lower and output is greater.
B price is higher and output is smaller.
C price is higher and output is greater.
D price is lower and output is smaller.
The correct answer and explanation is:
The correct answer is A: price is lower and output is greater.
In a perfectly competitive industry, firms are price takers, meaning they have no control over the market price and must accept the equilibrium price determined by supply and demand. This leads to a situation where firms in perfect competition produce at the point where price equals marginal cost (P = MC) and the firm earns zero economic profit in the long run. As a result, there is no incentive for firms to restrict output or raise prices.
On the other hand, a monopoly firm has significant market power, allowing it to set prices above the marginal cost in order to maximize its profits. To do so, a monopolist will restrict the quantity of output produced and sell at a higher price compared to a perfectly competitive industry. The monopolist maximizes profit by equating marginal revenue (MR) to marginal cost (MC), which results in a lower quantity of output and a higher price than in a perfectly competitive market.
In comparison, the perfectly competitive industry, by producing at the point where price equals marginal cost, results in a larger quantity of output and a lower price. This efficiency in resource allocation is one of the key characteristics of perfect competition, where consumer surplus is maximized and there is no deadweight loss. In contrast, the monopolist’s ability to set prices above marginal cost creates a deadweight loss, as some potential trades (where consumers are willing to pay more than the marginal cost) do not occur, reducing overall societal welfare.
Thus, a perfectly competitive industry will have a lower price and greater output than a monopoly.