Compare and contrast the four market models in terms of the profit-maximizing output level for each, the shut-down rule for each, the probability of long-run economic profits being earned, and their social desirability.

Question

What will be an ideal response?

Answer 1

All firms, regardless of the market environment they are operating within, will maximize profits by producing an output level in which marginal revenue equals marginal cost. They also have in common the shut-down rule: shut down whenever losses exceed total fixed costs (or when price is less than average variable costs) in order to minimize losses. They differ in terms of the likelihood of earning economic profits. The monopoly is most likely to earn economic profits in the long run, followed by the oligopoly and the monopolistically competitive firm (which is not very likely). The perfectly competitive market will most certainly not have any firms earning economic profits in the long run. Finally, the greater the degree of competition the more socially desirable the market. Therefore, the competitive market is the most socially desirable, followed by the monopolistically competitive, the oligopoly and then the monopoly. (One could argue that the monopolistically competitive market is the most socially desirable because it gives rise to the greatest variety of products from which consumers can choose; it's a matter of weighing these benefits against the costs.)