Question

Which of the following statements is correct?

a.The primary social problem caused by monopoly is monopoly profit.

b.The deadweight loss that arises in monopoly stems from the fact that the profit-maximizing monopoly firm produces a quantity of output that exceeds the socially-efficient quantity.

c.The deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax on a product.

d.The benefits that accrue to a monopoly’s owners are equal to the costs that are incurred by consumers of that firm's product.

Answer 1

Option C.

The deadweight loss caused by a monopoly seems to be similar to the deadweight loss caused by a tax.

This is because a tax placed on a product affects a consumer's willingness to pay for that good and also affects the production cost incurred by producers.

Similarly a monopolies higher price affects consumer's willingness to pay.

That is, when a monopoly firm charges higher price, consumers become less willing to purchase just as in the case of a product being taxed. This creates deadweight loss in both cases.

The only difference lies in the fact that, taxes help government in earning revenues while higher prices help a monopoly firm in earning greater profits.