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Chapter 8: Problem 2

When it comes to determining the quantity of goods to produce, how is a monopolist like a perfect competitor?

Short Answer

Expert verified
The monopolist and the perfect competitor both determine the quantity of goods to produce based on the principle of setting marginal cost equal to marginal revenue (MC=MR), as it's the key principle for profit maximization.

Step by step solution

01

Understand Perfect Competition

A perfectly competitive firm sets its output level where marginal cost equals marginal revenue (MC=MR). They are a price taker, which means the market price is given to them, and they calculate output based on that price. This is established by the intersection of MC and MR curves. Note down that in perfect competition, the marginal revenue corresponds to the given market price.
02

Understand Monopoly

A monopolist also produces goods up to the point where its marginal cost equals marginal revenue (MC=MR). However, unlike a perfectly competitive firm, a monopolist is a price maker, which means the price is not a given factor, rather it's determined by the monopolist on the demand curve above the intersection of MC and MR. Conclude that in a monopoly, the monopolist uses demand and marginal revenue information to find the optimal price and quantity.
03

Draw the Connection

The main similarity when both a perfect competitor and a monopolist determine the quantity of goods to produce, is that they both produce goods up to the point where marginal cost equals marginal revenue (MC=MR). Identify that this is the key principle for maximizing profit in both scenarios.

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