Question

In the textbook, The Applied Theory of Price, D. N. McCloskey refers to the equation MR= MC as the rule of rational life. Who follows this rule: monopolies, competitive firms, both or neither?

Answer 1

Monopolies and competitive firms both follow the rule of rational life, which is MR = MC. However, in perfect competition, MR equals price, while in monopoly, MR does not equal price.

Step-by-step explanation:

A monopolist and a perfectly competitive firm both follow the rule of rational life, which is MR = MC. This means that they will select the level of output where their marginal revenue (MR) equals their marginal cost (MC) in order to maximize their profits.

However, there is a key difference between the two. In the case of perfect competition, marginal revenue is equal to the price (MR = P), while for a monopolist, marginal revenue is not equal to the price, as changes in the quantity of output affect the price.

Therefore, both monopolies and competitive firms follow the rule of rational life, with the distinction that in perfect competition, MR equals price, while in monopoly, MR does not equal price.