Multiple Choice
Which of the following statements is true for a monopolist at the profit-maximizing output level?
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12. Monopoly
Monopoly Efficiency and Deadweight Loss
Multiple Choice
The deadweight loss associated with a monopoly occurs because the monopolist:
A
maximizes total surplus in the market
B
faces perfectly elastic demand
C
sets price equal to marginal cost
D
produces less than the socially efficient quantity of output
Verified step by step guidance1
Understand that deadweight loss in a monopoly arises due to inefficiency in the allocation of resources compared to a perfectly competitive market.
Recall that a monopolist maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC), not where price equals marginal cost.
Recognize that because the monopolist restricts output below the socially efficient level (where price equals marginal cost), some mutually beneficial trades between consumers and producers do not occur.
Identify that this reduction in output leads to a loss of total surplus, which is the deadweight loss, representing the value of trades that could have happened but do not due to monopoly pricing.
Conclude that the deadweight loss occurs because the monopolist produces less than the socially efficient quantity of output, causing inefficiency in the market.
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