Final answer:
The additional benefit consumers receive from buying goods is reflected in the consumer surplus, while the additional cost to the monopoly of producing the last unit is measured by the marginal cost. A monopolist seeks to maximize profits by ensuring marginal revenue exceeds marginal cost, and optimal social welfare is achieved when market price equals marginal cost.
Step-by-step explanation:
We can measure the additional benefit consumers receive from buying goods at a certain price, and we can measure the additional cost to the monopoly of producing the last unit by calculating the marginal cost (MC).
A monopolist can determine its profit-maximizing price and quantity by analyzing the marginal revenue (MR) and marginal costs of producing an extra unit. The additional benefit to consumers is typically measured by how much they are willing to pay over the cost of production, reflecting the consumer surplus. On the other hand, if the marginal revenue exceeds the marginal cost, then the firm should produce the extra unit, as it indicates that the benefits of producing one more unit exceed the costs involved and it will increase the monopoly's profits.
If we consider market price (P) and compare it to marginal cost, we can evaluate the benefit to society: If P > MC, society would benefit from producing more of the good as the benefits exceed the costs. Conversely, if P < MC, producing another unit would impose more costs on society than benefits. The optimum condition for overall societal welfare occurs when P = MC, which is the case with a perfectly competitive firm operating at profit-maximizing equilibrium. This is because at this point, the social costs and social benefits of producing the last unit are perfectly balanced.