Chapter 62, Problem 2CYU

a)

To determine

Society welfare under the monopoly.

Answer to Problem 2CYU

False.

Explanation of Solution

Society’s welfare is lower under monopoly because some consumer surplus is transformed into deadweight loss due to the high price charged by monopolists which reduces the total surplus. Hence, the given statement is false.

Economics Concept Introduction

A monopolist charges a higher price than a perfectly competitive firm which drive out some consumer from the market and reduces consumer surplus. As a result, deadweight is created and gives rise to inefficiency in the market.

b)

To determine

The reason behind the inefficiency in the monopoly market.

Answer to Problem 2CYU

True.

Explanation of Solution

A monopolist causes inefficiency because there are consumers who are willing to pay a price greater than or equal to the marginal cost but less than the monopoly price. A high price charged by monopolist drive out some consumer due to unaffordability which decreases demand and output level that led to deadweight loss and inefficiency in the market. Hence, the given statement is true.

Economics Concept Introduction

A monopolist charges a higher price than a perfectly competitive firm which drive out some consumer from the market and reduces consumer surplus. As a result, a deadweight is created and gives rise to inefficiency in the market.