This graph shows the cost and revenue curves faced by a monopoly. According to the graph shown,if this were a perfectly competitive market,the outcome in the short run would be:
A) Q1, P1.
B) Q1, P3.
C) Q2, P2.
D) The graph is of a monopoly, and therefore there is no way to determine a perfectly competitive outcome.

Question

This graph shows the cost and revenue curves faced by a monopoly.  According to the graph shown,if this were a perfectly competitive market,the outcome in the short run would be:
A) Q1, P1. 
B) Q1, P3. 
C) Q2, P2. 
D) The graph is of a monopoly, and therefore there is no way to determine a perfectly competitive outcome.

Quizplus · Accepted Answer

In a perfectly competitive market, firms operate at the point where the marginal cost equals the marginal revenue, which is shown as point Q2 on this graph. At this point, the price is equal to the marginal cost and there is no economic profit or loss. Since the monopoly has a higher price and lower quantity than the perfectly competitive market, it is not producing at the allocatively efficient level, where price equals marginal cost. Therefore, the perfectly competitive outcome would be at point Q2 and price P2.

This Graph Shows the Cost and Revenue Curves Faced by a Monopoly