Suppose regulators impose a price ceiling on a monopoly.If the price ceiling is set too high
A) deadweight loss will be eliminated.
B) deadweight loss will be reduced.
C) deadweight loss will be increased.
D) deadweight loss will not be affected.

Question

Quizplus · Accepted Answer

If the price ceiling is set too high, the monopoly will still be able to charge a price higher than the marginal cost. This will result in reduced deadweight loss since production and consumption will be closer to the socially optimal level than if the price ceiling was set too low or not at all. However, there may still be some deadweight loss due to the distortion of incentives for the monopoly to produce at a lower output level than would be socially optimal.

Suppose Regulators Impose a Price Ceiling on a Monopoly