Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Reduced quantity sold leading to unmet consumer demand
B
Increased consumer surplus due to higher prices
C
Higher production costs that firms cannot avoid
D
Increased competition driving prices up
Understanding the Answer
Let's break down why this is correct
Answer
The primary cause of deadweight loss in a monopolistic market is that monopolies set prices higher than the equilibrium price, which is the price where supply equals demand. When a firm has monopoly power, it can restrict output to increase prices, leading to fewer transactions than would occur in a competitive market. This means some consumers who would buy the product at a lower price cannot afford it at the higher price. For example, if a company sells a unique video game for $60 instead of the equilibrium price of $40, many potential buyers will not purchase it, resulting in lost sales and overall welfare. This loss of potential transactions creates deadweight loss, which is a measure of economic inefficiency.
Detailed Explanation
When a monopoly sets prices too high, fewer people can buy the product. Other options are incorrect because Some might think higher prices mean more benefits for consumers; It's a common belief that high costs cause deadweight loss.
Key Concepts
Deadweight Loss
Monopolistic Competition
Allocative Efficiency
Topic
Deadweight Loss in Pricing
Difficulty
easy level question
Cognitive Level
understand
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