In a market with market power, the equilibrium output is typically:

• A. Unrelated to the firm's pricing decisions
• B. Higher than in a perfectly competitive market
• C. Lower than in a perfectly competitive market
• D. Equal to the socially optimal output

Answer: (C)

Verified step by step guidance

1. Understand the concept of market power: A firm with market power can influence the price of its product, unlike firms in perfect competition which are price takers.
2. Recall the characteristics of a perfectly competitive market: Many firms, identical products, and no single firm can influence the market price, leading to an equilibrium output where price equals marginal cost (P = MC).
3. Recognize that a firm with market power typically restricts output to raise prices above marginal cost, resulting in a lower quantity produced compared to perfect competition.
4. Compare the equilibrium output under market power to the socially optimal output: The socially optimal output occurs where price equals marginal cost, which is higher than the output chosen by a monopolist or a firm with market power.
5. Conclude that the equilibrium output in a market with market power is lower than in a perfectly competitive market because the firm reduces output to maximize profits by setting price above marginal cost.