Question

Because a monopoly doesn't reduce total surplus or reduce the size of the economy (pie), it allows a bigger slice of the economic pie for the producers.

a. true
b. false

Answer 1

The statement is false because monopolies can create a deadweight loss by producing less and charging higher prices, leading to a reduction in total surplus. Perfect price discrimination leads to no consumer surplus. Monopolies may also become complacent, further reducing economic efficiency.

Step-by-step explanation:

The statement that a monopoly doesn't reduce total surplus or the size of the economy is false. A monopoly can result in a loss of total surplus because it tends to produce less output and sell it at higher prices than perfectly competitive markets, which leads to a deadweight loss in the economy.

While perfect price discrimination could theoretically lead to an efficient outcome because the monopolist would produce the same amount of output as in a perfectly competitive market, it also results in no consumer surplus because each consumer is paying exactly their maximum willingness to pay.

Moreover, monopolies can lead to inefficiency over time as they may lack incentives to innovate or improve their products. According to Nobel Prize-winning economist John Hicks, monopolies may 'bank their profits and slack off on trying to please their customers,' indicating a complacency that can result in an inefficient allocation of resources.