Question

We know that a firm in a competitive market can sell as much as it produces. Does this mean a firm in a competitive market should produce as much as it can? Explain your answer.

7- We know that a monopolist can choose any price it likes. Does this mean that a monopolist should choose the highest price?

Answer 1

We know that a firm in a competitive market can sell as much as it produces. Does this mean a firm in a competitive market should produce as much as it can? Explain your answer.

Answer :

Firm in competitive market can sell as much as it wants because for every level of output price is fixed. They are price taker. But that doesn't mean that it should produce as much as it can. Because firm has to see the cost too when it produce. Perfectly competitive firm should produce where Marginal revenue equals marginal cost to maximise its profit. If it produce more than that or less than that, profit will decrease for firm. So, frim can produce but should not produce as much as it can to maximise profits.

We know that a monopolist can choose any price it likes. Does this mean that a monopolist should choose the highest price?

Answer :

No that doesn't mean it has to charge whatever he want. It can charge whatever he want because monopolist is price maker but due to law of demand, when price will higher, quantity demanded will be lower. So, it has to charge the profit-maximizing price which is generally higher than perfectly competitive firm but it is not highest of monopoly. So, Monopoly can charge whatever he want but has to reduce price to sell more quantity.