Chapter 8: Problem 5

Firm A is a perfectly competitive firm, and firm B is a monopoly firm. Both firms are currently earning profits. Which firm is less likely to be earning profits in the future? Explain your answer.

Short Answer

Expert verified

In consideration of the characteristics of their market structures, the perfectly competitive firm A is less likely to be earning profits in the future compared to monopoly firm B.

Step by step solution

Understanding Perfect Competition

Perfectly competitive firms are price takers due to the large number of firms producing identical goods, meaning they cannot influence the market price. If a firm in a perfectly competitive market is earning profit, this gives incentive for new firms to enter the market. As new firms enter, the supply increases which then drives the market price down. As the price decreases, the profit decreases and eventually gets to a break-even point where firms make no economic profit.

Understanding Monopoly

A monopoly is a market with only one producer with exclusive control over a product or service because of barriers to entry. These barriers prevent other firms from entering the market, allowing the monopolist to enjoy high profits in the long term as there is no competition. The monopolist also chooses the price at which the goods are sold.

Making the comparison

Considering these concepts, it can be discerned that a monopolist firm (B) has a higher probability of continuing to earn profits into the future, as it decides the price and can prevent competition due to barriers. Conversely, perfectly competitive firms have no influence on market price and face constant threat of new competitors due to absence of barriers, hence firm A is less likely to be earning profits in future.

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Firm A is a perfectly competitive firm, and firm B is a monopoly firm. Both firms are currently earning profits. Which firm is less likely to be earning profits in the future? Explain your answer.

Short Answer

Step by step solution

Understanding Perfect Competition

Understanding Monopoly

Making the comparison

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