CLUNUL DIA Search Aplia Homework: Monopoly 5. Price And Output Under Perfect Competition And Monopoly Consider The Daily Market For Hot Dogs In A Small City. Suppose That This Market Is In Long-Run Competitive Equilibrium, With Many Hot Dog Stands In The City, Each One Selling The Same Kind Of Hot Dogs. Therefore, Each Vendor Is A Price Taker And Possesses
T he Correct Answer and Explanation is :
Correct Answer:
In long-run perfect competition, the price and output of hot dogs are determined where market demand equals market supply, and firms make zero economic profit (price = minimum ATC = MC).
In monopoly, the monopolist maximizes profit where MR = MC, setting a higher price and lower output than under perfect competition.
Explanation
In a perfectly competitive market, like the daily hot dog market in a small city with many identical vendors, no single vendor can influence the market price. Each hot dog stand is a price taker, meaning it accepts the market price as given. The product is homogeneous (identical), and there is free entry and exit in the market.
In long-run equilibrium, the market reaches a point where the economic profit for each firm is zero. This happens because if vendors were making profits, new vendors would enter, increasing supply and pushing the price down. If vendors were incurring losses, some would exit, reducing supply and pushing the price up. Ultimately, price adjusts until it equals the minimum point on the average total cost (ATC) curve, and price = marginal cost (MC).
Under a monopoly, the market is controlled by a single seller. The monopolist faces the downward-sloping market demand curve, meaning to sell more, the firm must lower its price. The monopolist maximizes profit by producing at the output level where marginal revenue (MR) = marginal cost (MC). However, because MR is below the demand curve, the monopolist charges a higher price and produces less output than would occur in a perfectly competitive market.
This leads to a deadweight loss—a loss of total surplus to society due to inefficiency. Consumers face higher prices and lower quantity under monopoly. While monopolists may earn long-run economic profits, the overall allocative efficiency is reduced compared to perfect competition.
In summary, perfect competition results in lower prices, higher output, and no economic profits in the long run, whereas a monopoly leads to higher prices, restricted output, and positive economic profits.
