Question

Using an appropriate graph explain why pricing by a monopolist results in inefficient outcomes. What is the deadweight loss of monopoly?

Answer 1

As seen by the above graph,the monopoly would produce where the MC=MR so that the profit maximizing output for a monopoly is QM and price is PM.

Whereas in perfect competition,the output is set where P=MCso that profit maximizing output is QC and profit maximizing price is PC

The monopoly produces a lower quantity and charges a higher price which causes inefficiency in the market and causes a deadweight loss equal to the shaded region in the graph above and this area is lost which decreases welfare in the market.