Following the assumption that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency?
A) output will be too small and its price too high.
B) output will be too large and its price too high.
C) output will be too small and its price too low.
D) output will be too large and its price too low.

Question

Quizplus · Accepted Answer

An unregulated monopolist tends to produce less output and charge a higher price than would be the case in a perfectly competitive market, leading to a loss of allocative efficiency. This is because the monopolist's goal is to maximize profits, which often involves setting a higher price than the marginal cost of production, a situation that does not occur in perfectly competitive markets where price equals marginal cost.

Following the Assumption That Firms Maximize Profits, How Will the Price