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Chapter 22: Problem 7

Which statement is true? (LO2) a) The monopolist and the perfect competitor both produce where \(\mathrm{MC}\) equals MR. b) Neither the monopolist nor the perfect competitor produce where MC equals MR. c) The monopolist, but not the perfect competitor, produces where \(\mathrm{MC}\) equals MR. d) The perfect competitor, but not the monopolist, produces where \(\mathrm{MC}\) equals MR.

Short Answer

Expert verified
The true statement is (a): The monopolist and the perfect competitor both produce where MC equals MR.

Step by step solution

01

Understand Marginal Cost (MC) and Marginal Revenue (MR) for different market structures

: Marginal Cost refers to the additional cost incurred with every extra unit produced by a firm. On the other hand, Marginal Revenue refers to the additional revenue generated from selling one more unit of a product. In a perfectly competitive market, every firm is a price taker and cannot control the product's price. The demand curve in this market is horizontal, and the Marginal Revenue is equal to the product's price. In a monopoly market, a single firm controls the entire market, and the demand curve is downward-sloping. Monopolists can control the product's price, so their Marginal Revenue is different from the price.
02

Analyze the production conditions

: To maximize its profit, a firm should produce until the cost of producing an additional unit (MC) is equal to the additional revenue generated from selling that unit (MR). Let's analyze the given statements: a) The monopolist and the perfect competitor both produce where MC equals MR: True or False? A perfectly competitive firm would indeed produce where MC equals MR, as it is the condition to maximize their profit. Similarly, a monopolist also produces where MC equals MR to achieve its profit maximization point. Hence, statement (a) is true. b) Neither the monopolist nor the perfect competitor produce where MC equals MR: True or False? Since we've established that both the monopolist and perfect competitor produce where MC equals MR, statement (b) is false. c) The monopolist, but not the perfect competitor, produces where MC equals MR: True or False? As we have already established that both the monopolist and the perfect competitor produce where MC equals MR, statement (c) is false. d) The perfect competitor, but not the monopolist, produces where MC equals MR: True or False? As mentioned earlier, both the monopolist and the perfect competitor produce where MC equals MR. Thus, statement (d) is false.
03

Identify the true statement

: Based on the analysis in steps 1 and 2, statement (a) is true, while the other ones are false. Therefore, the answer is: "The monopolist and the perfect competitor both produce where MC equals MR."

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Marginal Cost (MC)
Marginal Cost, or MC, is an important concept in economics. It represents the cost of producing one additional unit of a good or service. Imagine you're running a bakery and decide to bake one more loaf of bread; the cost of flour, yeast, and labor needed for that loaf is your Marginal Cost. Understanding MC is vital for making smart production decisions. If the MC of producing one more unit is lower than the price you can sell it for, making more can increase your profits.
  • MC includes variable costs like materials and direct labor.
  • Fixed costs are not part of MC, as they do not change with production volume.
MC is crucial for optimizing production efficiency and ensuring that resources are not wasted on units that cost more to produce than they are worth.
Marginal Revenue (MR)
Marginal Revenue, abbreviated as MR, is the additional income earned from selling one extra unit of a product. It shows how much revenue is gained by increasing sales incrementally. For example, if selling an extra cookie gives you an extra dollar in revenue, your MR is $1 for that unit. This concept is essential for profit maximization because it helps businesses decide how much to increase production or sales.
  • MR helps determine the output level that maximizes profit.
  • If MR exceeds MC, producing additional units is profitable.
In a perfectly competitive market, MR equals the product's market price since firms are price takers. But in a monopoly, MR is different due to the firm's ability to influence prices.
Perfect Competition
In a perfectly competitive market, numerous sellers and buyers interact freely. All firms produce identical products and hold minimal influence over the market price. Think of it like a farmer's market where many farmers sell the same fruit. Each seller takes the price as given by the market; they're price takers.
Characteristics include:
  • Many participants
  • Similar products
  • Easy entry and exit from the market
Under these conditions, the firm's demand curve is perfectly elastic, appearing as a horizontal line, meaning the firm can sell any quantity at the market price. Profit maximization occurs where Marginal Cost (MC) equals Marginal Revenue (MR), providing no incentive for price deviation.
Monopoly
A monopoly exists when a single company is the exclusive provider of a product or service, allowing it significant control over prices. Imagine owning the only water supply company in a region. You're able to set the price since there are no direct competitors.
Key traits of a monopoly include:
  • Single seller
  • High barriers to market entry
  • Unique product with no close substitutes
Unlike perfect competition, a monopolist faces a downward-sloping demand curve, meaning it must reduce prices to sell more units. Therefore, the Marginal Revenue (MR) in a monopoly is less than the price. Still, profit maximization occurs when MR equals Marginal Cost (MC), but the price is greater than both MR and MC.
Profit Maximization
Profit maximization is the goal for businesses striving to make the most money possible. Firms find the optimal level of production by analyzing where Marginal Cost (MC) matches Marginal Revenue (MR).
This idea is applicable in different market structures.
  • In perfect competition, firms will adjust output until MC equals MR, aligning production with market price.
  • Monopolies also strive for MC equal to MR, but they can set higher prices due to lack of competition.
Understanding this balance allows firms to avoid producing excess products and ensure that each unit sold contributes positively to their profits. By equating MC and MR, a firm ensures it operates at its most efficient production point, maximizing its potential earnings.

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Most popular questions from this chapter

Which statement is true about economic profit in the long run? (LO2,3) a) Both the monopolist and the perfect competitor make one. b) Neither the monopolist nor the perfect competitor makes one. c) Only the perfect competitor makes one. d) Only the monopolist makes one.

Which is the most accurate statement? (LO6) a) The rationale for natural monopoly has been strengthened by deregulation. b) Your local phone and electric companies will probably continue to be monopolies for at least another 50 years. c) Deregulation and competition tend to lower costs. d) Natural monopoly never had any economic basis.

The average American CEO earns times the earnings of the average worker. (LO7) a) 10 to 15 d) 300 to 600 b) 25 to 40 e) 1,000 to 1,200 c) 100 to 150

Each of the following is true about Walmart EXCEPT that (LO8) a) it is the largest employer in the United States b) it is the largest company in the world c) it pays its employees, on average, about the same as its competitors d) it drives hard bargains with suppliers and passes along the savings to its customers

Which statement is true? (LO3) a) The monopolist cannot lose money. b) The monopolist always operates a large firm. c) The monopolist will not lose money in the short run. d) The monopolist will not lose money in the long run.
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