Perfectly Competitive and Monopoly Firms

Perfectly Competitive and Monopoly Firms

  1. How does the demand curve faced by a perfectly competitive firm differ from the market demand curve in a perfectly competitive market?

The demand curve for a perfectly competitive firm is a horizontal line. The horizontal demand curve means that the firm can sell as much as it wants at the prevailing market price (Baumol, & Blinder, 2009). Similarly, the firm cannot sell any unit if it attempts to raise the price. Conversely, for a perfectly competitive market, the market demand curve is a downward sloping curve because it includes all firm in the market.

  1. A perfectly competitive firm has the following fixed and variable costs in the short run. The market price for the firm’s product is $140.
Output FC VC TC TR Profit/Loss











































  1. Complete the table.


TC= F.C + V.C




  1. What level of output should the firm produce to maximize profits?


For the firm to maximize profits, it should produce at output level 3. This is because, at this output, the firm uses the same supplies and resources to make the same profit realized at output level 4. However, in output level 4, the firm uses more labor to make profit.

  1. Assume this firm is making a loss when it produces its 7th unit of output. What should the firm do in the short-run? Should it operate at loss or shutdown in the short run?

In the short-run, the firm should continue to produce but it should reduce the revenue to level 4 to regain maximum profit.

  1. How does the profit maximization condition for a monopoly differ from that for a perfectly competitive firm? How does this difference impact efficiency under each market structure? Explain.

In the case of a monopoly, the firm maximizes profit at the point where the marginal revenue equals the marginal cost. Due to its downward slopping demand curve, the marginal revenue will be less than the price (Bumas, 2015). For instance, maximum profit is MR=MC<Price. On the other hand, the perfectly competitive firm maximizes profit where the marginal cost intersects the marginal revenue or price. With a monopoly firm, the price is not equal to the marginal cost. A monopoly creates inefficiency by setting prices above the marginal cost. Besides, firm does not efficiently allocate its resources. Therefore, due to higher prices and less output, the monopoly firm will cause a deadweight loss (Baumol, & Blinder, 2009). In a perfectly competitive market, the firm maximizes profit where marginal revenue equals marginal cost and price. Similarly, the firm achieves an efficient allocation of resources because the price equals the marginal cost.

  1. The following table provides market share information about the soft-drink industry. Review anti-trust laws and the merger guidelines under “Chapter 15: Monopoly and Antitrust Policy” and conduct your own research on S. anti-trust laws in the KU Online Library or the internet to answer the following questions.


Company Market Share
Coca-Cola 37%
Pepsi-Co 35%
Cadbury Schweppers 17%
Other 11%


  1. Apply the Herfindahl-Hirschman Index (HHI) market concentration rules that guide mergers between companies to prevent monopoly creation and to promote competition among firms. Based on the market shares of the companies in the table, the merger of which companies will be highly concentrated? What ethical rules will be affected based on U.S. anti-trust laws and merger guidelines in regard to a highly concentrated market?

The HHI market concentration is given by summing the square of individuals firms.

Coca-Cola =37^2 = 1,369

Pepsi-Co =35^2 =1,225

Cadbury Schweppers= 17^2 = 289

Other = 11^ = 121

The HHI pre-merger = 3,004

Based on the information from the table, the merger from Coca-Cola and Pepsi-Co will be highly concentrated. For instance, (35+37)^2 = 5,184.

The post-merger HHI is 5,184 + 289 + 121 = 5,594

The change in point is 5,594 -3,004 = 2,590

The Post-merger HHI is above 2,500. Similarly, the mergers are producing an increase in the HHI of more than 200 points (The United States Department of Justice, n.d.). Therefore, the mergers will be challenged because they are likely to increase market power.

  1. Do you think the Department of Justice and the Federal Trade Commission would approve a merger between any two of the first three companies listed in the table based U.S. merger guidelines and anti-trust laws?

The Department of Justice would not approve a merge between any of the first three companies. The merge between any of the first three companies produces an increase in HHI of more than 200 points and will likely be challenged by the Department of Justice and the Federal Trade Commission.

  1. Do you think this market has barriers to entry? If yes, what might be the market barriers?

The market has barriers to entry. The first barrier is large economies of scale. Established firms in the industry retain the monopoly power because of the cost advantage they have (Bumas, 2015). The firms can produce at lower cost compared to the rivals. Second, the government can grant monopoly to firm through the issue of patent or copyright. This will prevent other firms from entering into the business.



Baumol, W. J., & Blinder, A. S. (2009). Economics: Principles and policy. Mason, OH: South-Western/Cengage Learning.

Bumas, L. O. (2015). Intermediate Microeconomics: Neoclassical and factually-oriented models. Routledge.

The United States Department of Justice. (n.d.). Monopoly Power and Market Power in Antitrust Law. Retrieved September 25, 2016, from



Do you need an Original High Quality Academic Custom Essay?