Which of the following describes a benefit of monopolies relative to perfectly competitive markets?

• A. Monopolies eliminate barriers to entry for new firms.
• B. Monopolies can achieve economies of scale, potentially lowering average costs for consumers.
• C. Monopolies always produce at the socially optimal output level.
• D. Monopolies guarantee lower prices than perfectly competitive firms.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the characteristics of a monopoly and a perfectly competitive market. A monopoly is a market structure where a single firm controls the entire market supply, while perfect competition involves many firms with no single firm influencing the market price.
2. Step 2: Recognize that monopolies often have high barriers to entry, which prevent new firms from entering the market, unlike perfect competition where entry and exit are free.
3. Step 3: Identify that monopolies can achieve economies of scale because they operate on a larger scale, which can lower the average cost of production as output increases. This is a potential benefit compared to perfectly competitive firms, which are typically smaller and may not realize such cost advantages.
4. Step 4: Note that monopolies do not necessarily produce at the socially optimal output level; in fact, they often produce less and charge higher prices than perfectly competitive firms, leading to allocative inefficiency.
5. Step 5: Understand that monopolies do not guarantee lower prices; usually, prices are higher than in perfectly competitive markets due to lack of competition. Therefore, the key benefit is the potential for economies of scale lowering average costs, not lower prices or socially optimal output.