Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Societal welfare decreases due to deadweight loss.
B
Societal welfare increases because of higher profits.
C
Societal welfare remains unchanged since the quantity produced is optimal.
D
Societal welfare is maximized as the monopoly contributes to government revenue.
Understanding the Answer
Let's break down why this is correct
Answer
When a monopoly sets its price above marginal cost, it means that the price consumers pay is higher than the cost of producing one more unit of the product. This situation leads to a decrease in societal welfare because not all consumers who would benefit from the product at a lower price can afford to buy it. For example, if a company sells a medication that costs $10 to make but charges $20, some people who need the medication may not buy it, even though it would improve their health. As a result, fewer people benefit from the product, and the overall happiness or welfare of society decreases. In this way, monopolies can create inefficiencies where resources are not allocated in the best way for everyone.
Detailed Explanation
When a monopoly charges more than the cost to produce one more item, fewer people buy it. Other options are incorrect because Some might think that higher profits for the monopoly mean better welfare; It's a common mistake to think that if a monopoly is making money, everything is fine.
Key Concepts
Allocative Efficiency
Monopoly Pricing
Deadweight Loss
Topic
Allocative Efficiency in Monopolies
Difficulty
hard level question
Cognitive Level
understand
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