Answer to Question #251553 in Microeconomics for leenie

Question

assume that a pure monopolist and a purely competitive firm have the same unit costs. contrast the two with respect to price, out put profits allocation of resources and impact on income transfers

Answer 1

As both the pure monopolist and pure competitive firm have the same unit costs pure monopolists can charge a higher price than the purely competitive firm. While considering the pure monopolists and competitive firms pure monopolists are price makers while the purely competitive firm is the price takers. As monopolists are price makers they can charge a higher price than the pure competitive firms.

Pure Monopolists produce a lower output than pure competitive firms. The monopolists will charge a price greater than the marginal costs and produce a lower output than the pure competitive firms.

Monopolists will reap higher profits both in the long run and in the short run while pure competitive firms cannot make profits in the long run and can make profit only in the short run. In a perfectly competitive as firms equal marginal cost they earn no profit. In the case of monopolists, the price is greater than the marginal cost and will have higher profits both in the short-run and long run.

Monopoly has under-allocation or misallocation of resources because monopoly has a higher price and lower output than the purely competitive firms. In the case of the purely competitive firm, there is efficient allocation of resources as the price is equal to marginal cost in the case of competitive firms.

In the case of pure monopolists as the monopolists charge a higher price than the pure competitive firms there is the transfer of income from consumers to monopoly owners. This causes a transfer of income from the poor to the rich and there is greater inequality of income. There is no transfer of income from poor to rich as in pure competitive firms there is equality between price and marginal cost (P=MC)