Question

The government of Pandaria regulates monopoly prices. If the Pandarian government sets monopoly prices below the socially efficient level then deadweight loss:

A. Increase and there is a surplus output

B. decreases and there is a surplus of output

C. is unaffected

D. decreases and there is a shortage of output

E. Increases and there is a shortage of output

Answer 1

Option E Deadweightloss increases and there is shortage of output.

Deadweight loss of monopoly is the consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost. Because a monopoly charges a price above marginal cost, not all consumers who value the good at more than its cost buy it. Thus, the quantity produced and sold by a monopoly is below the socially efficient level. The deadweight loss is represented by the area of the triangle between the demand curve and the marginal cost curve. But this also allows for better profit.