Question

Assume that a pure monopolist and a purely competitive firm have the same unit costs. In the case of a pure monopolist, resources will be allocated

1) inefficiently, because the monopolist does not produce in the elastic range of the demand curve.
2) efficiently, because the pure competitor produces at the point of minimum ATC and equates price and MC.
3) inefficiently, because the monopolist does not produce at the point of minimum ATC and does not equate price and MC.
4) efficiently, because the pure competitor earns only a normal profit.

Answer 1

3) inefficiently, because the monopolist does not produce at the point of minimum ATC and does not equate price and MC

The correct answer is option 3, which states that a pure monopolist allocates resources inefficiently because they do not produce at the point of minimum ATC and do not equate price with MC.

Step-by-step explanation:

The question pertains to the allocation of resources in different market structures, specifically comparing a pure monopolist with a purely competitive firm when both have the same unit costs. Among the options provided:

• Option 1 is incorrect because it does not accurately describe why monopolists may be inefficient.
• Option 2 is misleading because it explains efficiency in the context of purely competitive firms, not monopolists.
• Option 3 is correct because a monopolist does not produce at the point of minimum average total cost (ATC) and does not equate price with marginal cost (MC), leading to inefficiency.
• Option 4 is incorrect because earning only a normal profit does not address the question of resource allocation efficiency.

In essence, monopolists tend to set a price higher than MC, which results in allocative inefficiency, meaning the firm does not produce enough of the good to meet the optimal level of demand at the lowest possible cost. Conversely, perfectly competitive markets achieve both productive and allocative efficiency by producing where P = MC and at the point of minimum ATC.