Good Grapes is selling grapes in a purely competitive market. Its output is 5000

Question

Good Grapes is selling grapes in a purely competitive market. Its output is 5000 pounds, which it sells for $5 a pound. At the 5000-pound level of output, the average variable cost is $4.00, the marginal cost is $4.25, and the average total cost is $4.50 a pound. Should the firm increase output, decrease output, or not produce? Why? How should the firm determine the optimal level of output?

If Good Grapes were to become a monopoly, how would the monopoly compare to perfect competition in terms of price, output and efficiency?

Explanation / Answer

THE FIRM SHOULD INCRESE THE OUTPUT, AS THE MARHINAL COST IS LESS THAN THE SELLING PRICE.

THE OPTIMUM LEVEL IS AT THAT POINT WHERE MARGINAL COST IS EQUAL TO SELLING PRICE.

DIFFERNCES:

1) PRICE

Under perfect competition price equals marginal cost at the equilibrium output, but under monopoly equilibrium price is greater than marginal cost. Under perfect competition marginal revenue is the same as average revenue at all levels of output. Thus at the equilibrium position under perfect competition marginal cost not only equals marginal revenue but also average revenue.

2) OUTPUT

Under monopoly price is higher and output smaller than under perfect competition.

3) EFFICIENCY

A monopolist can discriminate prices for his product, a firm working under perfect competition cannot. The monopolist will be increasing his total profit by price discrimination if he find

As against his a competitive firm cannot change different prices from different buyers since he faces a perfectly elastic demand at the going market price. If he increases a slights rise in price he will lose the sellers and makes loss. Thus a competitive firm can not discriminate prices which a monopolist can do.

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