Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases consumer surplus and promotes efficiency.
B
It decreases consumer surplus and can result in market failure.
C
It has no impact on consumer surplus or market efficiency.
D
It equally distributes consumer surplus among all consumers.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopoly, one company controls the entire market for a product or service, which gives it significant market power. This means the monopoly can set higher prices than what would occur in a competitive market. When prices are higher, consumers have to pay more, which reduces their consumer surplus—the difference between what they are willing to pay and what they actually pay. For example, if a monopolist sells a unique product for $100 when the competitive price would be $70, consumers lose the extra $30 of surplus they would have gained in a competitive market. This situation can lead to market failure because resources are not allocated efficiently; fewer people buy the product, and the overall welfare of society decreases.
Detailed Explanation
In a monopoly, one company controls the market. Other options are incorrect because Some might think monopolies help consumers by lowering prices; It's a common belief that monopolies don't change anything for consumers.
Key Concepts
market power
consumer surplus
market failure
Topic
Allocative Efficiency in Monopolies
Difficulty
hard level question
Cognitive Level
understand
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