In comparing long-run market structures, which of the following statements correctly expla… — JAMB UTME

In comparing long-run market structures, which of the following statements correctly explains why consumer welfare is lower under pure monopoly than under perfect competition?

The pure monopolist restricts output and charges a price exceeding marginal cost ( $P > MC$ ), whereas the competitive firm expands output until price equals marginal cost ( $P = MC$ ).Answer
B
The pure monopolist maximizes profit where marginal revenue equals price ( $MR = P$ ), whereas the competitive firm maximizes profit where marginal revenue is less than price ( $MR < P$ ).
C
The pure monopolist produces at the minimum point of its average total cost curve ( $P = \text{min } ATC$ ), whereas the competitive firm produces with excess capacity.
D
The pure monopolist maximizes combined consumer and producer surplus, whereas the competitive firm generates deadweight loss.

Answer

The pure monopolist restricts output and charges a price exceeding marginal cost (

P > MC

), whereas the competitive market expands output until price equals marginal cost (

P = MC

Allocative efficiency requires that price equals marginal cost (

P = MC

), which ensures that the value consumers place on the last unit equals the marginal cost of producing it. Perfectly competitive markets achieve this in long-run equilibrium. In contrast, a pure monopolist restricts output to maximize profits where

MR = MC

, resulting in

P > MC

, which causes allocative inefficiency and reduces consumer welfare through deadweight loss.

Step-by-Step Solution

Identify the condition for allocative efficiency.

Allocative efficiency occurs when resources are allocated such that consumer valuation equals the marginal cost of production, represented by

P = MC

This condition ensures social welfare and total economic surplus are maximized.

Compare market pricing and output decisions in long-run equilibrium.

A perfectly competitive firm sets

P = MR = MC

, resulting in optimal output and zero deadweight loss. A pure monopolist sets

MR = MC

, but because

P > MR

, it charges

P > MC

Because the monopolist charges a price greater than marginal cost, output is restricted below the socially optimal level.

Evaluate the impact on consumer welfare.

The restriction of output under monopoly reduces consumer surplus and creates a deadweight welfare loss.

Consumers pay a higher price and receive less output under monopoly than under perfect competition.

Key Concept

Comparison of Allocative Efficiency and Consumer Welfare across Market Structures

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