Monopolists are said to be allocatively inefficient because:
A) they produce where MR > MC.
B) at the profit-maximizing output price is greater than AVC.
C) they produce only the type of product they desire and do not consider the consumer.
D) at the profit-maximizing output the marginal benefit to society of additional output is greater than the marginal cost to society.
The correct answer and explanation is :
The correct answer is D) at the profit-maximizing output the marginal benefit to society of additional output is greater than the marginal cost to society.
Explanation:
Monopolists are allocatively inefficient because they set output at a level where the price consumers are willing to pay (which reflects the marginal benefit to society) exceeds the marginal cost (MC) of producing the good. In a perfectly competitive market, firms produce at the point where price equals marginal cost (P = MC), which leads to an efficient allocation of resources. At this point, the marginal benefit to society of producing one more unit of a good is exactly equal to the marginal cost of producing that unit.
However, in the case of a monopolist, the firm maximizes its profits by producing a quantity of output where marginal revenue (MR) equals marginal cost (MC), but because the monopolist faces a downward-sloping demand curve, the price at the monopolist’s chosen output is higher than the marginal cost. As a result, the monopolist’s output level is lower than the socially optimal output level, where P = MC. This means that the marginal benefit to society of consuming additional units (which is represented by the price consumers are willing to pay) exceeds the cost of producing those units (the marginal cost), indicating allocative inefficiency.
In simpler terms, monopolists restrict output to maximize their profit, leading to a situation where consumers would benefit from additional units being produced and sold at a price that reflects their marginal benefit. However, the monopolist does not produce these extra units because it would reduce the price and, ultimately, their profit. This results in a deadweight loss to society, which is the lost welfare that occurs because the monopolist produces less than the socially optimal quantity.
Thus, the monopolist’s behavior creates inefficiency by not producing enough output to meet the societal demand at a price equal to marginal cost.