Why is the outcome of a monopolist producing and selling not allocatively efficient?

• A. Because the monopolist always produces at the minimum point of average total cost.
• B. Because the monopolist faces perfectly elastic demand and cannot influence market price.
• C. Because the monopolist equates marginal cost and average revenue when choosing output.
• D. Because the monopolist sets price above marginal cost, resulting in a quantity less than the socially optimal level.

Answer: (D)

Verified step by step guidance

1. Understand the concept of allocative efficiency: it occurs when the price of a good equals the marginal cost of producing it, i.e., \(P = MC\), meaning resources are allocated optimally to maximize social welfare.
2. Recall that a monopolist maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC), i.e., \(MR = MC\), but unlike in perfect competition, marginal revenue is less than price (\(MR < P\)) due to the downward-sloping demand curve.
3. Recognize that because \(MR < P\), the monopolist sets a price (\(P\)) above marginal cost (\(MC\)), which means \(P > MC\), leading to a lower quantity produced than the socially optimal level where \(P = MC\).
4. Understand that this price above marginal cost causes a deadweight loss, representing the loss of total surplus and indicating that the monopolist's output is not allocatively efficient.
5. Conclude that the monopolist's outcome is not allocatively efficient because the quantity produced is less than the quantity that would maximize social welfare, due to the price being set above marginal cost.