Final answer:
Profit-maximizing firms set marginal revenue equal to marginal cost both in perfect competition and monopoly, but the outcome differs in each case. In perfect competition, marginal revenue equals price, while in a monopoly, price can be set higher than marginal cost. The correct answer is option a.
Step-by-step explanation:
Profit-maximizing firms set marginal revenue (MR) equal to marginal cost (MC) both in perfect competition and in monopoly situations. The critical point to understand is that while the principle holds true across different market structures, the implications and results differ between a perfectly competitive market and a monopolistic one.
In a perfectly competitive market, firms are price takers, meaning they must accept the market price. Consequently, a firm's marginal revenue is equal to the market price of the good (MR = P). Firms will produce where MR = MC to maximize profits.
For monopolies, however, they are price makers, which means they have the power to influence the price of their product by adjusting the quantity they produce. For a monopoly, marginal revenue does not equal price because the demand curve is downward sloping, and they can set prices higher than the marginal cost. Nonetheless, the rule for maximizing profits in a monopoly is also to equate MR to MC, but the corresponding price will be higher than the marginal cost.
In both cases, whether it is a perfectly competitive market or a monopoly, the condition for profit maximization is when MR = MC.