Question

Imperfect Competition (10 pts.)

(a) Discuss profit maximization in perfect competition and monopoly (Use of MR, MC, P, and Q required).

(b) Give two separate graphs and show the level of optimum output in both cases.

(c)Which market is efficient and why?

Answer 1

Answer a)

Perfect competition is a market situation in which where competition is at its greatest possible level. The significant characteristics of a perfect competitive market are as follows :-

1.Large number of buyers and sellers

2. Homogenous product is produced by every firm

3. Free entry and exit of firms

4. The products are homogenous in nature.

5. Zero advertising cost as the products are same.

6. Consumers have perfect knowledge about the market and are well aware of any changes in the market.

- Profit maximisation in a perfect competiton occurs when the three most important conditions are fulfilled. The conditions are as follows:-

1. The profit  maximisation at a certain level of quantity Q will occur when the Marginal Cost (MC) = Marginal Revenue (MR).

2. If another unit of good is produced after Q , the MC must rise after that.

3. In short run the price must be greater than or equal to the AVC.

Monopoly is a market situation in which there is only one seller controlling the market share of a good or commodity and there is no such strong competition from any other seller. The main features of a monopoly are :-

1. Single seller of the product.

2. Entry restrictions for new firms either involves huge investment or government restriction is there.

3. No close subsitutes.

4. The firm which is the only seller is the price maker and the consumers have to buy the good at the price set by the seller.

Profit maximisation in monopoly occurs when:-

The profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost i.e, MR = MC. If the monopoly produces a lower quantity, then MR > MC will be at those levels of output, and the firm can make higher profits by expanding output. If the firm produces at a greater quantity, then MC > MR, and the firm can make higher profits by reducing its quantity of output.

Answer b) photos are attached for Q2.

Answer c ) A market outcome is said to be efficient if it maximises social welfare. The social welfare maximises at point where marginal revenue equals marginal cost and that is the equillibrium level of output. The price in a perfect competition is driven by the market forces of demand and supply whereas in monopoly the firm being the only seller sets the price and tnat has to accepted by the consumer as it is whether high or low depending upon the consumer's preferences. There are lots of buyers and sellers in a perfect competition and the product is homogenous, so if a seller tries to sell its product at a price higher than the market price he would end up making no profits because in perect competiton a consumer is well aware about the product and price offered by the other sellers and consumer being rational will naturally go for a lower price and will avoid that seller that was charging a higher price. In this way a consumer cannot be deceived by the sellers in a perfectly competitive market and thus it will lead to wellfare of consumers. Also due to the tight packed competition the sellers will focus more on the quality of the goods produced and not using any loopholes to make high profit. This will enhance the quality of goods presented before the buyers and will increase their satisfaction.Thus we can conclude that a perfect competition market is more efficent than a monopoly.