Question

Consider a monopolist facing a linear demand curve. Assume the marginal cost of production is constant. This would be true whether the industry is served by a monopolist or by a number of competitive firms. Suppose you know that the monopoly is inefficient because it produces 200 fewer units than what would be produced if the market is competitive. The monopoly quantity must be:_________

Answer 1

200 units

Step-by-step explanation:

Perfect Competition are many firms selling similar products at same prices. So, constant prices imply that their marginal revenue = average revenue = price.

Monopoly is single seller of products. Their MR curve is below their AR curve. And, it is also twice steeper than AR (demand) curve, because it has double slope then that.

So, perfect competition is at equilibrium where MC = (MR = AR = P). However monopoly's optimum output is where MR = MC, & the optimal price is found by corresponding point at higher AR (demand) curve.

Given that MC curve is constant : Monopoly's output will be half perfect competition output, as per above explanation. So, if monopoly is producing 200 less than perfect competitive output. Being it half the perfect competition output, it could be producing output = 200 currently.