Social Studies Praxis Practice Test

When compared with perfectly competitive firms in long-run equilibrium, a monopoly with an identical cost structure will charge a

1. higher price and produce lower output.

2. higher price and produce higher output.

3. lower price and produce higher output.

4. lower price and produce lower output.

The correct answer is: higher price and produce lower output.

A monopoly, compared to perfectly competitive firms in long-run equilibrium, is characterized by its ability to set prices above marginal cost, allowing it to maximize its profits. In a perfectly competitive market, firms are price takers and will produce where price equals marginal cost, resulting in output levels that satisfy consumer demand at a lower price point. In contrast, a monopoly faces little to no competition, which enables it to restrict output to raise prices. This means that it can control the market supply to maximize profits rather than produce at the socially optimal level where price equals marginal cost. As a result, the monopolist produces a lower quantity of goods compared to what would be produced in a perfectly competitive market and charges a higher price due to the reduced availability of goods. This outcome highlights distinct differences in market structures in terms of pricing and output levels.