Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The price equals the marginal cost of production, maximizing societal welfare.
B
The price is set above marginal cost to ensure higher profits for the monopolist.
C
The quantity produced is lower than in competitive markets to maintain high prices.
D
The price is below marginal cost to increase demand at the risk of losses.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistic market, allocative efficiency occurs when the price of the product is equal to the marginal cost of producing it. This means that the amount of goods produced is just right for what consumers want, ensuring that resources are used effectively. For example, if a company sells a unique type of software for $50 and it costs them $50 to create one more copy, they are at allocative efficiency. At this point, the quantity of software available matches what consumers value it at, leading to the best outcome for both the company and the customers. However, monopolies often set prices higher than the marginal cost, which can lead to less than optimal production levels and consumer dissatisfaction.
Detailed Explanation
When a monopoly is allocatively efficient, the price matches the cost to produce one more unit. Other options are incorrect because This option suggests that the monopoly keeps prices high for more profit; This statement implies that monopolies produce less to keep prices high.
Key Concepts
Allocative Efficiency
Monopoly Pricing
Societal Welfare
Topic
Allocative Efficiency in Monopolies
Difficulty
easy level question
Cognitive Level
understand
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