In a market served by a monopoly the marginal cost is 60 and

In a market served by a monopoly, the marginal cost is $60 and the price is $110. In a perfectly competitive market, the marginal cost is $60. What would happen to the price in each market if the marginal cost increased from $60 to $75?

Solution

Perfectly Competitive Market : In this market price is equal to the marginal cost as due to excessive compition among the sellers, the price reduces to the essential cost

Monopoly : Here the Firm charges the price that maximizes its profit function.

Now after increase in MC from $60 to $75

Price in Perfect Compitive Market= $75 as compition brings down price to cost

Price in Monopoly Market = $110+$15(Increment in MC is added to the price)=$125 as the frim charges the profit maximizing price