Question

Which of the following statements is a major criticism of a pure monopoly as a source of allocative inefficiency? rev: 05_15_2018 Multiple Choice

A. A pure monopoly fails to expand output to the level where the price of an additional unit is just equal to its marginal cost.
B. A pure monopoly has no incentive to produce efficiently, because even the inefficient pure monopoly can be assured of economic profits.
C. A pure monopoly will always generate economic profit, and that means that prices are too high.
D. A pure monopoly has an unfair advantage because it can purchase labor at a lower price than perfectly competitive firms can.

Answer 1

Answer:

The correct answer is option A.

Explanation:

A pure monopoly is a market where there is only single firm producing a good with no close substitutes. The firm is a price maker and faces a downward sloping demand curve.

The market demand curve and the demand curve of the firm are the same.

The firm is able to maximize profit at the point where the marginal revenue is equal to marginal cost. This output level is less than socially optimal level of ouput and creates a dead weight loss. A pure monopoly firm does not produces at allocative efficient level.