Which of the following statements correctly differentiates between a monopoly and a perfectly competitive firm?
A) A perfectly competitive firm faces an upward-sloping demand curve, whereas a monopoly faces a horizontal demand curve.
B) A perfectly competitive firm sets its product price at its marginal cost, whereas a monopoly sets the price above its marginal cost.
C) A perfectly competitive firm faces a horizontal demand curve, whereas a monopoly faces an upward sloping-demand curve.
D) A perfectly competitive firm sets its product price above its marginal cost, whereas a monopoly sets its product price equal to its marginal cost.

Question

Quizplus · Accepted Answer

The key difference between a monopoly and a perfectly competitive firm is that a monopoly has the power to set its price above its marginal cost, while a perfectly competitive firm sets its price equal to its marginal cost. In a perfectly competitive market, firms face a horizontal demand curve, meaning they must accept the market price and cannot influence prices through their actions. In a monopoly, the firm faces the entire market demand curve and can choose to produce any level of output it desires, which allows it to set a price above its marginal cost. Therefore, option B is the correct choice.

Which of the Following Statements Correctly Differentiates Between a Monopoly