Suppose both a monopolist and a perfectly competitive firm are producing in their respective markets at a point where marginal cost is $8 and marginal revenue is $10. What should the profit-maximizing firms do?
A) Both the monopolist and the perfectly competitive firm should increase output until MC = MR.
B) Both the monopolist and the perfectly competitive firm should decrease output until MC = MR.
C) The monopolist should increase output but the perfectly competitive firm should shut down.
D) The monopolist should keep producing at this level but the perfectly competitive firm should decrease output until MC = MR.

Question

Quizplus · Accepted Answer

Both the monopolist and the perfectly competitive firm should increase output until MC = MR because at this point, they are maximizing their profits. For a monopolist, the profit-maximizing level of output is where marginal revenue equals marginal cost (MR=MC) while a perfectly competitive firm maximizes profits where marginal cost equals price (MC=P). Since marginal revenue and price are the same in a perfectly competitive market, the profit-maximizing level of output is where MC=MR=P. Therefore, both should increase output until MC=MR=10.

Suppose Both a Monopolist and a Perfectly Competitive Firm Are