suppose the widget industry is perfectly competitive and faces constant returns to scale.A monopoly purchases all widget producers in the market. List three ways in which the market outcome under monopoly will differ from the market outcome under perfect competition

Answer 1

1) Price: Under perfect competition, the market price is determined by the forces of supply and demand, and all firms in the industry are price takers. However, under monopoly, the monopolistic firm has the power to set the price at a level that maximizes its own profits. This usually results in a higher price for the product compared to what would prevail under perfect competition.

2) Quantity: In a perfectly competitive market, the quantity produced is determined by the intersection of the demand and supply curves. Multiple firms competing against each other strive to produce the optimal level of output to maximize profits. However, under a monopoly, the firm has the ability to restrict the quantity produced in order to maximize its own profits. This often leads to a lower quantity being produced compared to what would be produced under perfect competition.

3) Deadweight Loss: Perfect competition generally results in an efficient allocation of resources, where the total surplus is maximized. However, a monopoly is likely to create a deadweight loss, which represents the loss of economic efficiency due to the monopolistic firm exercising its market power. This occurs because the monopoly restricts output to a level lower than the socially optimal level, leading to a loss in overall welfare in the market.