Question 2 (p. 215)
2 a) Explain how the monopolist determines the profit-maximizing level of output and price.
The monopolist determines output and profit maximization the same way perfect competitors do where MC = MR however, that point is at a different quantity for monopolists because the demand and MR are different. Since monopolists are the one dominant firm in an industry, they have no competitors and so will usually set their price as high as possible, not having to worry about consumers switching to different firms.
b) Discuss the view that competitive markets are always more efficient than monopolies.
Competitive markets are almost always more efficient than monopolies. In competitive markets, productive efficiency is achieved in the long run, but in monopolies it does not since the firm’s price is higher than the marginal cost – they are not producing enough of the good. Also, competitive markets are more beneficial to the consumer. Since there is so much competition between firms in the same industry in a competitive market, each one will try to keep their prices as low as possible to assure none of their customers will switch to a competing firm. Thus, competitive markets are in many ways more efficient than monopolies.