Question

Competitive firms differ from monopolies in which of the following ways?(i)Competitive firms do not have to worry about the price effect lowering their total revenue.(ii)Marginal revenue for a competitive firm equals price, while marginal revenue for a monopoly is less than the price it is able to charge.(iii)Monopolies must lower their price in order to sell more of their product, while competitive firms do not.

Answer 1

The correct answers in this case are options (ii) and (iii).

Step-by-step explanation:

As opposed to competitive market structure,the Marginal Revenue(MR) for a monopoly is less than the output price(P).In competitive market,the market competition or firm rivalry pushes the price down to a fixed level which is equal to MR or the revenue earned by all firms(price takers) from selling 1 more unit of output.Due to absence of any competition,a monopoly(price maker) can set the P and production level at the point where MR is equal to the Marginal Cost of production(MC) or the cost of producing one more unit of output.This is the profit maximizing price and output of a monopoly.Now,to sell more output,the monopoly has to increasingly reduce the P in order to attract more customers and it will continually set the P at the profit maximizing level of output where MR=MC.Therefore,for a monopoly,the P or output price is less than the MR obtained,while due to high competition or firm rivalry,all the competitive firms are able to charge a fixed and uniform P for each unit of output and earn identical MR as well.