Question

In a market served by a monopoly, the marginal cost is $60 and the price is $110. In a perfectly competitive market, the marginal cost is $60. If the marginal cost increased from $60 to $75, the monopoly would raise its price _____, and the price in the perfectly competitive market would _____.

Answer 1

Answer: In a market served by a monopoly, the marginal cost is $60 and the price is $110. In a perfectly competitive market, the marginal cost is $60. If the marginal cost increased from $60 to $75, the monopoly would raise its price by less than $15, and the price in the perfectly competitive market would increase to $75.

Explanation: The monopolist attends to the market demand, therefore the choice of the monopolist is limited by the market demand. If you set a very high price, you will only sell the amount that the demand you want to buy at that price, so it will only increase by less than $ 15.

In a market of perfect competition the companies are accepting price and will produce until the price is equal to the marginal cost so the price would rise to $ 75.