Question
Asked Oct 27, 2019
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Does a monopolistic competitor produce too much or too little output compared to the most efficientlevel ? What practical considerations make it difficult for policymakers to solve this problem?

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Expert Answer

Step 1

A monopolist is a single supplier to a market. The goods produced by a monopolist do not have close substitutes. Hence, it is the monopolist’s output decision that determines the market price.

Step 2

Market outcome for monopoly

For profit maximization, a monopolist chooses to produce output level at which marginal revenue is equal to marginal cost.

As per figure (1) below, the profit maximizing level of output for a monopoly is equal to QM. As at this level, marginal revenue curve and marginal curve intersect. The demand curve indicates the price PM at this level of output.

In the figure (1), the shaded green region indicates the consumer surplus and the shaded blue region indicates the producer surplus.

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ΜΟΝΟΡΟLY Price Consumer Surplus Marginal Cost PM Marginal ducer Surplus Revenue Demand Quantity QM Figure (1)

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Step 3

Market outcome for perfect competition

In a competitive market, the firm produces until the point price equals marginal cost.

Therefore, as shown in figure (2), QC is the equilibrium quantity and PC is the correspondin...

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PERFECT COMPETIΤION Price Consumer Surplus Marginal Cost Pc Marginal Revenue Producer Surplus Demand Qc Quantity Figure (2)

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