Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost curves, would you expect prices to be higher in a monopoly or a monopolistically competitive market?
What will be an ideal response?
Prices are likely to be higher in a monopoly than in a monopolistically competitive market. Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost and read price off the demand curve. The demand curve facing a firm in a monopolistically competitive market is fairly elastic (that is, it is fairly flat) because other firms' goods are close (but not perfect) substitutes. Since monopolies face steeper demand curves, prices are likely to be higher in a monopoly.
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