How do a competitive firm, monopolist and monopolistically competitive firm determine its profit-maximizing level of output...

How do a competitive firm, monopolist and monopolistically competitive firm determine its profit-maximizing level of output and price? Explain your answer.

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Expert Solution

For all of these market structures the profit-maximizing level of output is determined by the intersection of marginal revenue and marginal cost curve. The corresponding price is then determined by the demand function

Monopoly and monopolistic competitive firms face downward sloping demand function and marginal revenue function under which marginal revenue function lies below the demand function. In case of purely competitive firm, demand function is perfectly elastic because Market price is determined already by the market and the firm can only decide how much to produce.

Therefore, purely competitive firm uses P = MC to determine output which maximizes profit and Monopoly and monopolistic competitive firms use MR = MC to determine the output. Corresponding price is then found using the demand function. Generally the price is greater and the output is lower in this market structures relative to purely competitive market

Rahul Sunny answered 1 month ago

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