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31 January, 15:15

3. Explain why price is equal to marginal revenue in pure competition but not in a monopoly. Include in your explanation why the marginal revenue curve is steeper than the demand curve for a single price monopolist?

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  1. 31 January, 15:53
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    The answer is in a perfect competition profit is maximized when marginal cost equal marginal revenue and price is equal to average revenue and marginal revenue, while in monopolist profit is maximized when marginal cost is equal to marginal revenue.

    Explanation:

    The firm in a perfectly competitive market is a price taker, the price in the market is determined by the market forces of demand and supply. The firm has to sell their product at the ruling market price. The demand curve facing the firm in perfectly competitive market is horizontal or perfectly elastic, profit is therefore maximized when the marginal cost is equal to average revenue and marginal revenue. The firm in the market operate at the output level in which the price and marginal revenue is equal to marginal cost. Whatever prices that change the market demand or supply will change the demand curve faced by the firm. The firm cannot do anything to this than to accept the market price and the demand curve.

    In a monopoly the demand curve is identical to the demand curve of the firm, because industry demand curve is downward sloping. The monopolist can either set the price or quantity not the two. when one is determined the value of the other will be determined by the demand function. The profit maximization of the monopolist also requires that marginal cost must be equal to marginal revenue just like in the case of perfect completion. when the monopolist equates MR and MC the monopolist determines its output and the market price for the product. The revenue curve is steeper than the demand curve, because the straight line is the market demand. The firm will have to reduce The price of the product if they want to sell more of their product the unit of the product sold is the AR which is equal to the price. Therefore the AR curve of the monopolist and the perfect competition MR and AR are both identical that informed the reason why the marginal revenue curve is steeper than the demand curve for a single price monopolist.
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