Monopolies are socially inefficient because the price they charge is:

• A. less than marginal cost
• B. equal to marginal cost
• C. equal to average variable cost
• D. greater than marginal cost

Answer: (D)

Verified step by step guidance

1. Understand the concept of social inefficiency in the context of monopolies: Social inefficiency occurs when the allocation of resources does not maximize total surplus (consumer plus producer surplus).
2. Recall that in perfect competition, firms produce where price equals marginal cost (\(P = MC\)), which leads to an efficient allocation of resources.
3. Recognize that a monopoly maximizes profit by producing where marginal revenue equals marginal cost (\(MR = MC\)), but since the monopoly faces a downward-sloping demand curve, the price (\(P\)) it charges is greater than marginal revenue (\(P > MR\)).
4. Since \(MR = MC\) at the profit-maximizing output, and \(P > MR\), it follows that the monopoly price is greater than marginal cost (\(P > MC\)). This price markup causes a deadweight loss, leading to social inefficiency.
5. Therefore, the key reason monopolies are socially inefficient is that the price they charge exceeds marginal cost, reducing the quantity produced below the socially optimal level.