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Difficulty: HardMonopoly: Short-Run and Long-Run Price and Output Determination

In long-run equilibrium, a profit-maximizing monopolist operating under conventional U-shaped cost curves will adjust its plant size to produce at the minimum point of its long-run average cost (LACLAC) curve, thereby achieving productive efficiency.

Answer: Answer

Answer

The statement is False. A profit-maximizing monopolist in long-run equilibrium operates at an output level below the capacity that minimizes long-run average cost, resulting in excess capacity and productive inefficiency.
Evaluating the statement as False is correct because a monopolist's profit-maximizing rule (MR=MCMR = MC) under downward-sloping demand prevents output from reaching the minimum point of long-run average cost, causing productive inefficiency and excess capacity.

Step-by-Step Solution

1
Identify the monopolist's long-run profit-maximization condition.
The firm sets long-run marginal revenue equal to long-run marginal cost (LMR=LMCLMR = LMC).
Profit maximization requires equalizing incremental revenue and incremental cost.
2
Analyze the relationship between Price (PP), Marginal Revenue (LMRLMR), and Average Cost (LACLAC).
Because the market demand curve slopes downward, P>LMR=LMCP > LMR = LMC.
To sell additional units, the monopolist must lower the price on all units sold.
3
Determine the position of equilibrium on the LACLAC curve.
Equilibrium output occurs on the declining portion of the LACLAC curve, to the left of its minimum point.
Since LMRLMR lies below the demand (ARAR) curve, the intersection LMR=LMCLMR = LMC falls at an output level smaller than the scale that minimizes LACLAC.
4
Evaluate productive efficiency.
Productive efficiency is not achieved.
Productive efficiency requires producing at minimum LACLAC, which monopoly long-run equilibrium fails to attain.

Key Concept

Long-Run Monopoly Equilibrium and Productive Inefficiency (Excess Capacity)
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Topics

Monopoly: Short-Run and Long-Run Price and Output Determination

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