Question

3.Explain fully why monopolies lead to a “deadweight” loss but perfect competition does not, even though both maximize profits by producing the output where MR = MC. Under what conditions will the monopoly price be lower than the perfectly competitive price, assuming that both are maximizing profits?

Use the personal opinion to answer，thanks.

Answer 1

Solution(s):

a monopoly actually produces upto the point where MR=MC and that is where demand is not equal to MC. they are free to set prices or production quantities, but not both because they faces a downward sloping demand curve. they cannot have a high quantity of sales or high price because if there is high price then people will buy less. but a perfectly competitve market produces where demand is equal to MC, since demand and MR are equal to price. in case of a monopoly the demand intersects with the MC curve at a point higher than the actual demand where price is also high with higher quantity than before. the deadweight loss is the area from where the quantity produced and goes to where demand equals MC. since in a perfect competition demand and MC are same, so deadweight loss is zero.

it is hard for a monopoly to charge a lower price than perfectly competitive price unless they are bound to do so. in case of tax or subsidy by the government, the monopoly can charge more or less respectively depending on the way of profits. if the demand is lower in case of monopoly than perfect competiton then it can end up with lower price in case of monopoly than in perfect competition. if the demand is less where MR=MC then at that point price will be lower.