Which statement about the differences between monopoly and perfect competition is incorrect?

• A. Both monopoly and perfect competition produce at the point where marginal cost equals marginal revenue.
• B. Barriers to entry are high in monopoly, but low in perfect competition.
• C. In perfect competition, firms are price takers, while a monopoly is a price maker.
• D. A monopoly can earn long-run economic profits, whereas firms in perfect competition earn zero economic profit in the long run.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the key characteristics of perfect competition and monopoly. Perfect competition involves many firms, identical products, no barriers to entry, and firms are price takers. Monopoly involves a single firm, unique product, high barriers to entry, and the firm is a price maker.
2. Step 2: Recall the profit-maximizing condition for firms. Both types of firms maximize profit where marginal revenue (MR) equals marginal cost (MC). However, the shape of MR differs: in perfect competition, MR equals price (P), while in monopoly, MR is less than price due to downward sloping demand.
3. Step 3: Analyze the statements given. The statement claiming both monopoly and perfect competition produce where MR = MC is true in terms of profit maximization, but the implication that price equals MR in both cases is false because in monopoly, price is greater than MR.
4. Step 4: Evaluate the other statements: high barriers to entry in monopoly vs. low in perfect competition is correct; firms being price takers in perfect competition and price makers in monopoly is correct; monopoly earning long-run economic profits while perfect competition firms earn zero economic profit in the long run is also correct.
5. Step 5: Conclude that the incorrect statement is the one suggesting both monopoly and perfect competition produce at the point where marginal cost equals marginal revenue without recognizing the difference in price and marginal revenue relationship between the two market structures.