Question

1. Compared to a competitive firm, monopolies will
   1. Have greater innovation
   2. Have lesser innovation
   3. Have the same amount of innovation
   4. Maximize innovation

Answer 1

A monopoly firm is a single seller because there is barriers to entry. In a pure monopoly industry there is a single firm. The barriers to entry are those factors which lead to restriction of entry by the new firms. These are patent laws which restrict entry of new firms. License and copyrights are also example of barriers to entry.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

As it can be description above that in perfect competition there is large number of firms, so there is more competition, therefore there is an incentive to invest more for technological innovations for reducing the cost of production. But in case of monopoly there is no competition, therefore there is no incentive to invest more on the technological innovations.

Hence it can be said that compared to a competitive firm, monopolies will have lesser innovation.

Hence option b is the correct answer.