Question

Which of the following statements about monopoly equilibrium and perfectly competitive equilibrium is incorrect?

a. In the long run, economic profits are driven to zero in both a monopoly and a perfectly competitive market.
b. Price is greater than marginal cost in monopoly, and price equals marginal cost in perfect competition.
c. When a monopoly exists, the consumer surplus from the market is less than it would be if the same market were perfectly competitive.
d. Monopoly output will be less than will the output of a comparable perfectly competitive industry.

Answer 1

Option (a) is incorrect because unlike a perfectly competitive market, a monopoly can maintain positive long-run economic profits due to barriers to entry. In perfect competition, economic profits are driven to zero in the long run due to the free entry and exit of firms.

Step-by-step explanation:

The question pertains to the differences between monopoly equilibrium and perfectly competitive equilibrium. Option (a) is incorrect because in the long run, economic profits are not necessarily driven to zero in a monopoly as they are in a perfectly competitive market. Here's the explanation for each choice:

• Economic profits are driven to zero in a perfectly competitive market due to the entry of new firms when they see an opportunity for profit. Monopolies can maintain positive economic profits due to barriers that prevent the entry of new competitors.
• Price is indeed greater than marginal cost in a monopoly because the monopoly maximizes profit by setting a price above marginal cost. In perfect competition, price equals marginal cost.
• Consumer surplus is less in a monopoly because the higher prices and lower output compared to a perfectly competitive market reduce consumer benefits.
• Monopoly output is less than the output in a perfectly competitive industry since monopolies restrict output to maximize profits, whereas perfectly competitive firms produce where price equals marginal cost.

The correct option for the asked question is (a), which wrongly assumes that economic profits are driven to zero in both market structures in the long run.