Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly.Which of the following statements regarding economic surplus in each market structure is true?
A)Under perfectly competitive conditions, economic surplus in this industry equals consumer surplus plus producer surplus.Under monopoly conditions, some consumer surplus is transferred to producer surplus, but economic surplus is the same as it was under perfectly competitive conditions.
B)Under perfectly competitive conditions, economic surplus in this industry is maximised.Under monopoly conditions, economic surplus is minimised.
C)Under perfectly competitive conditions, economic surplus is equal to consumer surplus; there is no producer surplus because firms are price-takers.Under monopoly conditions, economic surplus is equal to producer surplus.
D)Under perfectly competitive conditions, economic surplus is maximised.Under monopoly conditions, economic surplus is less than under perfect competition and there is a deadweight loss.

Question

Quizplus · Accepted Answer

In perfect competition, economic surplus is maximised because the market forces forces sellers to sell at a price equal to marginal cost, producing a socially optimum level of output. However, in monopoly, the producer reduces output to increase price and profit, resulting in deadweight loss due to the underproduction of goods and services. Therefore, economic surplus is less than under perfect competition, and there is a deadweight loss.

Assume a Hypothetical Case Where an Industry Begins as Perfectly