1) Compare the profit maximization of a perfectly competitive firm and a monopoly. Support your answer...

1) Compare the profit maximization of a perfectly competitive firm and a monopoly. Support your answer graphically.

Expert Solution

Since due to monopoly, the deadweight loss arises because the efficient quantity is not produced in the case of monopoly compare to the perfectly competitive firms. Hence a monopoly firm decreases the society well-being.

Perfectly competitive markets.

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.

A perfectly competitive firm profit-maximizing condition is

P=MC

If P> ATC, then there will be profit

If P< ATC, then there will be loss.

Monopoly

Since due to monopoly, the deadweight loss arises because the efficient quantity is not produced in the case of monopoly compare to the perfectly competitive firms. Hence a monopoly firm decreases the society well-being.

A monopoly firm is a single seller of the goods and this firm is price maker and not the price taker because it is only a single firm who supply the goods in the entire market.

The profit-maximizing condition is

MR=MC

If P> ATC, then there will be profit

If P< ATC, then there will be loss.

Rahul Sunny answered 1 year ago

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