Final answer:
In a monopolistic market, the price set by a monopolist at the profit-maximizing quantity is higher than marginal cost, because the monopolist charges the highest price consumers are willing to pay, in contrast to a perfectly competitive market, where price equals marginal cost.
Step-by-step explanation:
At the profit-maximizing quantity, the price of a product in a monopolistic market is typically higher than the marginal cost. A monopolist will set the profit-maximizing quantity where marginal revenue (MR) is equal to marginal cost (MC). However, the monopolist then charges the highest price consumers are willing to pay for that quantity, which is found by going up to the demand curve from the profit-maximizing quantity. This price is above the marginal cost because the monopolist has market power and faces a downward-sloping demand curve, allowing it to charge more than the marginal cost.
For example, in a scenario outlined in step 2, the monopolist decides what price to charge, which is typically above the average cost curve, indicating that the firm is earning profits. The fact that a monopolist continues to earn profits without facing new competition due to barriers to entry is a clear sign of monopoly power.
In contrast, in a perfectly competitive market, the price would be set equal to marginal cost, and no firm can earn long-term economic profits.