Pure monopolies are said to be allocatively inefficient because:

• A. they maximize consumer surplus
• B. they produce where price is greater than marginal cost
• C. they set price equal to marginal cost
• D. they always produce at the lowest possible average total cost

Answer: (B)

Verified step by step guidance

1. Understand the concept of allocative efficiency: Allocative efficiency occurs when the price of a good equals the marginal cost of producing it, i.e., \(P = MC\). This means resources are allocated in a way that maximizes total social welfare.
2. Recall how a pure monopoly determines output: A pure monopoly maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC), i.e., \(MR = MC\), but because the monopolist faces a downward-sloping demand curve, the price (\(P\)) is greater than marginal revenue (\(MR\)).
3. Recognize the relationship between price and marginal cost in monopoly: Since \(P > MR\) and \(MR = MC\) at the profit-maximizing output, it follows that \(P > MC\). This means the monopolist restricts output below the socially optimal level, causing allocative inefficiency.
4. Contrast this with perfect competition: In perfect competition, firms produce where \(P = MC\), achieving allocative efficiency, but monopolies do not, leading to a deadweight loss.
5. Conclude why monopolies are allocatively inefficient: Because monopolies produce where \(P > MC\), they do not allocate resources efficiently, which is why they are said to be allocatively inefficient.