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Homework answers / question archive / If, at the output where marginal cost equals marginal revenue, both a pure competitor's and a monopolist's marginal revenue is $5

If, at the output where marginal cost equals marginal revenue, both a pure competitor's and a monopolist's marginal revenue is $5

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If, at the output where marginal cost equals marginal revenue, both a pure competitor's and a monopolist's marginal revenue is $5.00:

A) both sellers' profit-maximizing price will be $5.00.

B) both sellers' profit-maximizing price will be greater than $5.00.

C) the pure competitor's profit-maximizing price will be $5.00, and the monopolist's profit-maximizing price will be greater than $5.00.

D) the monopolist's profit-maximizing price will be $5.00, and the pure competitor's profit-maximizing price will be greater than $5.00.

E) None of the above is correct.

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C. The pure competitor's profit maximising price will be $5 and the monopolist's profit maximising price will be greater than $5. Reason: In case of a perfect competition, each individual seller faces a perfectly elastic demand curve. Hence the price is equal to the marginal revenue. So at the profit maximising level of output, the marginal revenue = marginal cost = price. Whereas in case of monopoly, the profit maximising level of output is set at the level where the MR = MC. But the price is set at the AR corresponding to the level where MR = MC. Since AR curve lies above the MR curve in case of monopoly, hence the price will be set higher than $5.

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