Multiple Choice
If the monopolist's fixed cost is \$25, the monopoly's total costs when maximizing profit is:
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12. Monopoly
Monopoly Efficiency and Deadweight Loss
Multiple Choice
What is the end result of the creation of a monopoly in terms of market efficiency?
A
A deadweight loss occurs due to reduced output and higher prices compared to perfect competition.
B
There is no change in total welfare compared to a perfectly competitive market.
C
Market efficiency increases because monopolies produce at the socially optimal output.
D
Consumer surplus is maximized as monopolies lower prices below marginal cost.
Verified step by step guidance1
Understand the concept of market efficiency, which occurs when resources are allocated in a way that maximizes total surplus (the sum of consumer and producer surplus).
Recall that in a perfectly competitive market, firms produce where price equals marginal cost (\(P = MC\)), leading to an efficient allocation of resources with no deadweight loss.
Recognize that a monopoly maximizes profit by producing where marginal revenue equals marginal cost (\(MR = MC\)), but because the monopolist faces a downward-sloping demand curve, the price (\(P\)) is greater than marginal cost (\(P > MC\)).
Analyze the effects of the monopoly's higher price and reduced output compared to perfect competition: consumer surplus decreases, producer surplus may increase, but total surplus decreases due to the loss of mutually beneficial trades, creating a deadweight loss.
Conclude that the creation of a monopoly results in reduced market efficiency because the output is lower and prices are higher than in a perfectly competitive market, causing a deadweight loss.
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