The following figures show the demand and cost curves of a perfectly competitive firm and a monopoly respectively.Figure 11.7
D: Average Revenue
AC: Average cost
MC: Marginal cost
MR: Marginal cost
-Why does an efficiency loss arise under monopoly rather than under perfect competition?
A)A monopolist charges a lower price for the product to gain market entry.
B)A monopolist sells a lesser quantity at a higher price.
C)There is a net increase in consumer surplus but a net decline in producer surplus.
D)There is an increase in producer surplus, consumer surplus remaining unchanged.
E)A monopolist sells a greater quantity than a perfect competitor.

Question

The following figures show the demand and cost curves of a perfectly competitive firm and a monopoly respectively.Figure 11.7
  D: Average Revenue
AC: Average cost
MC: Marginal cost
MR: Marginal cost
-Why does an efficiency loss arise under monopoly rather than under perfect competition?
A)A monopolist charges a lower price for the product to gain market entry. 
B)A monopolist sells a lesser quantity at a higher price. 
C)There is a net increase in consumer surplus but a net decline in producer surplus. 
D)There is an increase in producer surplus, consumer surplus remaining unchanged. 
E)A monopolist sells a greater quantity than a perfect competitor.

Quizplus · Accepted Answer

Under perfect competition, the firm produces at the point where the marginal cost intersects the demand curve, i.e., at the point of productive efficiency. However, under monopoly, the firm produces at a lower output level where the marginal revenue intersects the marginal cost curve. This leads to allocative inefficiency, where the price charged by the monopolist is higher than the marginal cost of production, leading to a deadweight loss in consumer surplus. Hence, the best choice is B as the monopolist sells a lesser quantity at a higher price, leading to a loss in social welfare.

The Following Figures Show the Demand and Cost Curves of a Perfectly