Allocative inefficiency happens in a monopoly because at the profit-maximizing output level,
A) P ATC.
B) P MR.
C) P MC.
D) P AVC.

Question

Allocative inefficiency happens in a monopoly because at the profit-maximizing output level,
A) P > ATC.
B) P > MR.
C) P > MC.
D) P > AVC.

Quizplus · Accepted Answer

Allocative efficiency occurs where P = MC, but in a monopoly, the profit-maximizing output level occurs where MR = MC. Therefore, the price charged (P) is higher than the minimum cost of producing an additional unit (MC), resulting in allocative inefficiency.

Allocative Inefficiency Happens in a Monopoly Because at the Profit-Maximizing