Answer to Question #295053 in Microeconomics for Magodi

Question

) What are the main features of the perfectly competitive market? (6 marks)

b) With the help of well-labeled diagrams, compare the short run equilibrium of a firm under a

perfectly competitive market structure and a monopoly market structure. (14 marks)

Answer 1

a) Firms are said to be in perfect competition when the following conditions occur: (1) many firms produce identical products; (2) many buyers are available to buy the product, and many sellers are available to sell the product; (3) sellers and buyers have all relevant information to make rational decisions about the product being bought and sold; and (4) firms can enter and leave the market without any restrictions—in other words, there is free entry and exit into and out of the market.

b) A significant difference between the two is that while under perfect competition price equals marginal cost at the equilibrium output, under monopoly equilibrium price is greater than marginal cost. Consequently, under monopoly, average revenue (or price) is greater than marginal revenue at all levels of output.