Question

The existence of deadweight loss in a monopoly market demonstrates that a monopolist is:

a. not allocatively efficient
b. facing a rising average total cost
c. not making a positive profit
d. facing a rising marginal cost

Answer 1

The existence of deadweight loss in a monopoly indicates that the monopolist is not allocatively efficient because they do not produce where P equals MC, causing higher prices and lower quantities than in a competitive market, hence leading to a welfare loss.

Step-by-step explanation:

The existence of deadweight loss in a monopoly market demonstrates that a monopolist is not allocatively efficient. This inefficiency arises because a monopolist does not produce at the quantity where the price (P) equals the marginal cost (MC), which is the allocatively efficient point. Instead, monopolists set their output level where the price is greater than the marginal cost (P > MC), leading to a higher price and lower quantity than what would be found in a perfectly competitive market. This results in a deadweight loss as the total surplus within the market is not maximized, showing that the monopolist's production and pricing strategy leads to a welfare loss to society.