5. Monopoly versus perfect competition Aa Aa Consider the market for hot dogs in
ID: 1114414 • Letter: 5
Question
5. Monopoly versus perfect competition Aa Aa Consider the market for hot dogs in a small dity. Suppose that being a hot dog vendor requires a licence, which is easily Issued. Assume the licences are spread around so that there are many hot dog stands In the city. Each sells the same kind of hot dog, and each vendor is a price taker and possesses no market power. Assuming no fixed costs and a constant marginal cost, the graph that follows shows the dally demand (D) and sup (S) curves in the market for hot dogs. Place the red point (cross symbol) on the graph to indicate the market price and quantity that will result from perfect competition (PC). Dashed drop lilnes will automatically extend to both axe PRICE (Dollars per hot dogl 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 PC Outcome 0 20 40 60 80 100 120 140 160 180 200 QUANTITY IHot dogs per dayl Help Clear ALLExplanation / Answer
under perfect competition Price is always equal to Average Revenue equal Marginal Revenue equal marginal cost equal average cost.. We know that under perfect competition, equilibrium price and output is determined by the free play of demand and supply forces. In the above figure, under perfect competition equilibrium quantity 120 unit of hot dog will be sold at dollar 2.0 i.e $2
under monopoly market profit will be maximum when MC equals MR. Thus under monopoly market equilibrium quantity will be 60 . since price is determined by the demand and so 60 units will be sold at dollar 3.5 ,
under perfect competition under monopoly
price $ 2 $ 3.5
quantity 120 60
Given the summary of the two different market structures, I can infer that in general the price is lower under perfect competition and the quantity is lower under monopoly.
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