Question

1. Draw a graph of a monopolist. Show and explain why the monopolist is not productively and allocatively efficient.

Answer 1

The monopolist always tries to maximize their profit which they are able to do by equating Marginal Revenue with Marginal Cost. This happens at a output level of Q_m and price P_m. Refer the attached picture above.

As we can see in the process of maximizing profit the monopolist is setting MR equal MC due to this the resultant price per unit is greater than the Marginal cost that is P>MC. While in a competitive market the price would be set equal to MC, A lower price will be profitable to more consumers. Under perfect competition output would be Q_c which is greater than Q_{m .} Thus, in monopoly the output is less than perfect competition.

From above we can conclude that since P>MC so, Monopoly is allocatively inefficient.

The monopoly is also productively inefficient because the output level of monopoly that is Qm is not at the lowest point of AC. Here, we don't consider the AC for output decision. Under perfect competition the output is set at that point where MC=AC.

Refer the above picture.

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