The socially optimal price (P = MC) is socially optimal because: LO12.7 a. it reduces the monopolist’s profit.
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The socially optimal price (P = MC) is socially optimal because: LO12.7 a. it reduces the monopolist’s profit. b. it yields a normal profit. c. it minimizes ATC. d. it achieves allocative efficiency |
Here is the full solution including the answer and explanation.
Explanation
d is correct
P = MC is the socially optimal price because at this price resources are efficiently allocated and the consumers pay the price, which is equal to the cost of producing extra units. This is socially optimal because of the intersection of the downward sloping demand curve with the upward sloping marginal cost curve and induces the regulated monopoly to produce each unit where the benefit exceeds its cost.
a is incorrect
The statement P = MC is true, as it reduces monopolists' profit to the extent that it may bear a loss. This is because monopolists' fixed costs are not recovered when the price is set equal to marginal cost.
b is incorrect
Purely competitive firms earn normal profit at P = MC, but the monopolists might incur losses.
c is incorrect
The interaction of the average total cost curve and demand curve gives a fair return price. It is greater than the socially optimal price, but the monopolist can recover its average fixed cost. At, P = MC monopolists incurs loss.
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