When compared with the purely competitive industry with identical costs of production, a monopolist will produce:
A) more output and charge the same price.
B) more output and charge a higher price.
C) less output and charge a higher price.
D) less output and charge the same price.
The correct answer and explanation is :
The correct answer is C) less output and charge a higher price.
Explanation:
A monopoly occurs when a single firm dominates the market, producing a good or service with no close substitutes. In contrast, a perfectly competitive market is characterized by many firms, identical products, and free entry and exit. To understand why a monopolist produces less output and charges a higher price than a perfectly competitive industry, let’s break it down:
- Profit Maximization:
- In a perfectly competitive market, firms are price takers. This means the price is determined by market supply and demand. Firms can sell as much output as they want at the prevailing market price, which equals marginal cost (MC) in the long run.
- A monopolist, however, is a price maker. It has control over the market supply and can set the price. To maximize profit, the monopolist chooses a level of output where marginal revenue (MR) equals marginal cost (MC), but since the monopolist faces a downward-sloping demand curve, the price is set higher than the marginal cost.
- Output and Price Differences:
- In a perfectly competitive industry, firms produce at the point where price equals marginal cost (P = MC). This results in efficient production, where resources are allocated optimally, and the price reflects the true cost of production.
- A monopolist restricts output to maximize profit, as it can sell fewer units at a higher price. To achieve this, the monopolist faces a trade-off: in order to sell one more unit, it must lower the price for all units, which means marginal revenue decreases faster than the price.
- As a result, the monopolist produces less output and charges a higher price compared to a perfectly competitive market. The monopolist’s price exceeds the marginal cost, creating deadweight loss and leading to a less efficient allocation of resources.
Thus, compared to a perfectly competitive market, a monopolist produces less output and charges a higher price, as it aims to maximize its profits by restricting output.