Multiple Choice
Which scenario best exemplifies the difference between efficiency and effectiveness in time usage?
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0. Basic Principles of Economics
Allocative Efficiency, Productive Efficiency, and Equality
Multiple Choice
Pure monopolies are said to be allocatively inefficient because:
A
they maximize consumer surplus
B
they produce where price is greater than marginal cost
C
they set price equal to marginal cost
D
they always produce at the lowest possible average total cost
Verified step by step guidance1
Understand the concept of allocative efficiency: Allocative efficiency occurs when the price of a good equals the marginal cost of producing it, i.e., \(P = MC\). This means resources are allocated in a way that maximizes total social welfare.
Recall how a pure monopoly determines output: A pure monopoly maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC), i.e., \(MR = MC\), but because the monopolist faces a downward-sloping demand curve, the price (\(P\)) is greater than marginal revenue (\(MR\)).
Recognize the relationship between price and marginal cost in monopoly: Since \(P > MR\) and \(MR = MC\) at the profit-maximizing output, it follows that \(P > MC\). This means the monopolist restricts output below the socially optimal level, causing allocative inefficiency.
Contrast this with perfect competition: In perfect competition, firms produce where \(P = MC\), achieving allocative efficiency, but monopolies do not, leading to a deadweight loss.
Conclude why monopolies are allocatively inefficient: Because monopolies produce where \(P > MC\), they do not allocate resources efficiently, which is why they are said to be allocatively inefficient.
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