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Monopolies, deadweight loss, social cost

Reasons why monopolists do not exhibit resource allocative efficiency. Why monopolists cannot obtain any price they wish. Deadweight losses when a firm produces at Q =MC. Social costs of maximizing marginal utility.

1. The perfectly competitive firm exhibits resource allocative efficiency (P=MC), but the single price monopolist does not. What is the reason for this difference?

2. Because the monopolist is a single seller of a product with no close substitutes, is it able to obtain any price for its good that it wants? Why or why not?

3. Is there a deadweight loss if a firm produces the quantity of output at which price equals marginal cost? explain.

4. It has been noted that rent seeking is individually rational, but socially wasteful. Explain.

Solution Preview

1. The demand curve for a perfectly competitive firm is flat because there are many substitutes available. Monopolists, on the other hand, have a downward sloping demand curve. This means that they are price-makers; they can influence price by changing output. The perfectly competitive firm is too small to do this.

Like the competitive firm, the monopoly's output rule is MR=MC. The price charged to maximize profit is higher on the demand curve than the price that maximizes ...

Solution Summary

Reasons why monopolists do not exhibit resource allocative efficiency. Why monopolists cannot obtain any price they wish. Deadweight losses when a firm produces at Q =MC. Social costs of maximizing marginal utility.

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