Compare and contrast the decision-making processes of a competitive firm versus a monopoly firm.

Expert Solution

A firm that operates in the perfect competition does not have a control over the price and faces a tougher competition from other firms, therefore, firm in the perfect competition has no incentive to produce the innovative products as they cannot control the market price because market price is determined by the industry, and if any firm charges above the market price then no one is going to buy from that firm because it is assumed in the perfect competition that there is no asymmetric information among the buyers and sellers and both buyers and sellers know the market price. So, the firm in the perfect competition produces at that point where price is equal to the marginal cost and price is the same as the average revenue and marginal revenue.

On the other hand, a monopoly firm is the single seller to the market and has a control over the price, therefore, a monopoly firm's price is always greater than the marginal revenue and optimal level of production under the monopoly firm occurs at that point where marginal revenue is equal to the marginal cost. So, it is important to note that price in the perfect competition is always equal to the marginal revenue, and price in the monopoly firm is always greater than the marginal revenue due to the market power.

Rahul Sunny answered 1 year ago

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