4. Monopoly versus perfect competition Consider the daily market for hot dogs in

Question

4. Monopoly versus perfect competition Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power The following graph shows the demand (D) and supply (S MC) curves in the market for hot dogs. Place the black point (plus symbol) on the graph to indicate the market price and quantity that wil result from perfect competition. Parfect Conpatitiern idi 1.5 ro 106 40 175 210 245 20 315 350 CUANITY (Het dog) Now suppose that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm

Explanation / Answer

In perfect competition equilibrium occurs when supply curve intersects demand curve. This happens when quantity is 175 and price is 2.0

In monopoly equilibrium quantity is achieved when MR curve intersects MC curve, i.e. quantity is 105 , corresponding price for the equilibrium quantity is determined through demand curve, therefore price is 3.

In general price is higher under MONOPOLY and quantity is lower under MONOPOLY.

A correct statement-

A monopoly cost may be lower than competitive firm in the long run

This is so because monopoly is the single seller, so it's average cost to produce each unit may be lower.

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