Figure 11-16
Refer to Figure 11-16. The allocative inefficiency caused by a profit-maximizing monopoly amounts to

Question

Figure 11-16 
Refer to Figure 11-16. The allocative inefficiency caused by a profit-maximizing monopoly amounts to

Quizplus · Accepted Answer

The allocatively efficient quantity for this market is where the marginal cost (MC) equals the demand (D) curve, which is at a quantity of 8. However, the monopoly chooses to produce at a quantity of 6, where MC is less than the price (P) but the demand curve is higher than that price. This means that the monopoly is not producing enough units to satisfy the full demand of the market. The allocative inefficiency is the difference between the price that consumers would be willing to pay for the last unit of output (at 8 units) and the marginal cost of that unit. In this case, that amounts to $250 ($500 - $250).

Figure 11-16 Refer to Figure 11-16. the Allocative Inefficiency Caused by a Caused