Question

Answer 1

Answer: Option (B): Above marginal cost.

The socially efficient price is where the price is set equal to the marginal cost.

$MC=P$

Since monopolist first produces where the marginal cost is equal to the marginal revenue and then charges the price equal to the price which is above the marginal cost.

A monopolist charges a price above the marginal cost for the quantity produced.

Since the monopolies are charging prices higher than the marginal cost, therefore the monopolies are socially inefficient.

The monopolist first produces where MR=MC and then charges the price on the demand curve for the quantity produced.

The marginal revenue is twice the slope of the demand curve. So when the monopolist charges the price on the demand curve. This price is above the social efficiency price of MC.

The socailly efficien price is MC.

The monopolist charges the price Pm.

As P_M> MC, As it charges the price above the marginal cost. Therefore the monopolies charge the socially inefficient price.

So the correct option is (B): Above marginal cost.

Why other option not correct:

Option (A): equal to the marginal revenue: As monopolies, neither charge price equal to marginal revenue nor it would have been a socially efficient price. So it is incorrect.

Option (C): On the demand curve: It is true that monopolies charge the price on the demand curve, but it is not the reason why it is socially inefficient. Since the condition of the socially efficient price is that it is equal to the marginal cost. So its charging price on the demand curve is not the reason why it is socially inefficient. So it is incorrect.

Option (D): Above demand: As monopolies, neither charge price above demand nor it would have been a socially efficient price. So it is incorrect.

So the correct option is (B): above marginal cost.