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    Monopoly versus perfect competition

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    Do you agree or disagree with the statement that, " A monopolist always changes the highest possible price?" Also, explain why cant an individual firm raise its price by reducing output or lower it's price to increase sales volume in a purely competitive market?

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    Solution Preview

    The pricing decision for a monopoly is: The monopolist will make decision on the output by equating its marginal revenue (MR) to its marginal cost (MC) and charging the price subject to the demand. In other words, after making its output decision based on its MR and MC the monopolist will go up to the demand curve to decide on the price. It is the price maker. Therefore, the statement is true subject to the condition mentioned above. Otherwise the statement is false. The monopolist cannot simply charge the highest possible price without considering its MR and MC condition. However, monopolist can charge at higher prices than the price decided on the ...

    Solution Summary

    Monopolist is a price maker. It will make production decision based on its marginal revenue equals to its marginal cost and decided on the price subject to the demand curve. All the firms in the perfectly competitive market are price takers. They take the price as given, which is also equal to their demand curve, and making their production decision based on its marginal cost equal to the common marginal revenue. In the long run all firms producing at the price equal to their average cost or making a normal profit. If they increase the price they will lose customers and if they charge lower than the going market price they will lose money for every unit produced.