Question

A. Compare and contrast profit maximizing conditions under monopoly and monopolistic competition in the short-run.

B. Compare and contrast profit maximizing conditions under perfect competition and monopolistic competition in the long-run.

Answer 1

Answer : A) Monopoly : In monopoly, the firm earns profit where Marginal revenue = Marginal cost. This is the equilibrium condition for the monopoly firm which is profit maximizing. As the firm has market power, the firm charges higher price level than the equilibrium price level on equilibrium quantity level which makes super normal profit for the firm in short run. This attract to enter many firms into the market but because of entry barrier new firms cannot enter into the market and hence the monopoly firm can earn super normal profit.

Monopolistic Competition : In monopolistic competition many firms exists into the market. In short run the firms in monopolistic competition earns profit at Marginal revenue = Marginal cost equilibrium condition. In monopolistic competition the firm has free entry and exit power. But here the firms charges higher price level than the equilibrium price level which makes profit to firms in short run.

From the above discussion it is clear to us that for both monopoly and monopolistic competition the equilibrium condition is Marginal revenue = Marginal cost which is profit maximizing condition for them because both has market power and hence charge higher price level than the equilibrium price level. But there is one difference between them. This is that free entry does not exist in monopoly whereas in monopolistic competition any firm can entry or exit freely into the market.