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Monopolies are inefficient because they (i) eliminate barriers to entry. (ii) price their product at a level where marginal revenue exceeds marginal cost. (iii) restrict output below the socially efficient level of production. a. (i) and (ii) only b. (ii) and (iiii) only d. (i), (ii), and (iii)

Ask by Griffin Wagner. in the United States
Mar 16,2025

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Monopolies are inefficient because they restrict output below the socially efficient level of production.

Solución

To determine which statements about monopolies are correct, let's analyze each statement: 1. **(i) Eliminate barriers to entry.** - This statement is incorrect. Monopolies typically create and maintain barriers to entry, which prevent other firms from entering the market. This is one of the reasons they can sustain their market power. 2. **(ii) Price their product at a level where marginal revenue exceeds marginal cost.** - This statement is also incorrect. In a monopoly, the price is set above marginal cost. A profit-maximizing monopolist will produce where marginal cost equals marginal revenue, and since the price is higher than marginal cost, marginal revenue will be less than the price. 3. **(iii) Restrict output below the socially efficient level of production.** - This statement is correct. Monopolies restrict output to maximize profits, which leads to a lower quantity produced than would be socially optimal. This results in a deadweight loss to society. Based on this analysis, the correct answer is: **c. (iii) only** However, since this option is not provided, it seems there might be a misunderstanding in the options. The correct interpretation of the statements leads to the conclusion that only statement (iii) is true regarding the inefficiency of monopolies.

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Monopolies are known for their significant market power, which allows them to set prices higher and restrict production. This causes them to operate at levels where their marginal revenue is less than the marginal cost, leading to an overall inefficiency in resource allocation. On the other hand, historically, monopolies like the Standard Oil Company in the late 19th century monopolized entire markets, demonstrating how they can stifle competition and innovation, ultimately harming consumers by creating a lack of choice and higher prices.

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