Question

Who would you expect to have lower costs of production, a monopolist or a competitive firm?

Answer 1

Answer - A competitive firm would have lower cost of production. A competitive firm earns zero economic profit in the long run. Thought it can earn positive or negative economic profit in the short run. Competitive firms set their level of output where average cost of the firms is minimum. It means price would be equal to AVC in the long run. In the long run for competitive firms,

AVC = MC = Price

The monopolist firm can earn positive or negative profit in the short run but it earns positive economic profit in long run generally. Since monopolist has full control over supply of product therefore it is price maker. Monopolist price is always higher to the marginal cost of firm. Monopolist faces a downward sloping demand curve and twice as steep marginal revenue curve. The MR curve lies below AR curve in monopoly market. Therefore in the long run, monopoly price would be higher that marginal cost of the firms. The monopolist does work on minimum point of the AVC curve. Thus production cost will be higher for monopolist. Generally,

Price > AVC

In conclusion, competitive firms would have lower cost of production and monopoly firm would have higher cost of production.