Question

Monopolies are inefficient because

a. they charge a price above marginal cost.
b. they always make above-normal profits.
c. they maximize profits.
d. they price discriminate.

Answer 1

Monopolies are considered inefficient because they are neither productively nor allocatively efficient, often resulting in higher costs, less output, higher prices, and less incentive for innovation compared to a competitive market.

Step-by-step explanation:

Monopolies are considered inefficient for several reasons. First, monopolies are not productively efficient because they do not produce at the minimum of the average cost curve. This means that monopolies have higher average costs than would be the case in a competitive market. Secondly, monopolies are not allocatively efficient because they do not produce the quantity of goods where the price (P) equals the marginal cost (MC). As a result, monopolies produce less and charge a higher price than competitive firms, leading to a reduction in consumer surplus and overall welfare.

Moreover, the lack of competition in a monopolistic market can result in a lack of incentives for innovation, as monopolists do not need to innovate to maintain their market position against potential challengers. For these reasons, monopolies can be seen as inefficient compared to a perfectly competitive industry, where numerous firms produce at P=MC, thus maximizing consumer and economic welfare.