Question

Question 6: In General Equilibrium, we assume all economic agents are price takers. A monopolist, however, is not a price taker. If the economy has a monopoly seller of some good, rather than a price taking seller of some good, which of the following is true?

(a) The first fundamental theorem of welfare economics still holds

(b) The equilibrium price will be equal to the marginal cost of producing the good

(c) The allocation that is reached in equilibrium will feature a deadweight loss and will not be pareto efficient

(d) All of the above

Please also explain why! Thanks.

Answer 1

Option (c) is TRUE

(a)

In this case, the first fundamental theorem of welfare economics will not hold. The theorem says that any competitive equilibrium leads to pareto efficient allocation of available resources. So, the inherent assumption of consumers being the price takers will get violated and the theorem will not hold. FALSE

(b) Due to presence of Price makers such as single seller in the market, the actual price will not measure the marginal values of all the exchange and Price will not be equal to MC of producing the good. FALSE

(c) Monopoly exchange is characterized by charging high prices and high deadweight loss to the society. The market output in monopoly will be less than what may be produced in a perfectly competitive set-up. So, the allocations will not be pareto efficient. One can be made better off by making some other worse-off. So, TRUE

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