compared to perfect competition, a natural monopoly will most likely be associated with a decrease in A deadweight loss B product surplus C consumer surplus D equilibrium quantity the correct answer is C, but why D is wrong?
I feel C is the “most” correct answer among them although D is not wrong either but maybe not as significant as C.
I’d intuitively choose c…i think that is the best answer.
Both C and D are correct. A monopoly restricts output and raises price. Consumer surplus shrinks, the monopoly gains and a deadweight loss arises. (Page:188, CFAI Economics)
C is correct, D is wrong. Let’s think about this in terms of the line quoted by minocfa. “deadweight loss arises”. What is deadweight loss? It’s the area between the supply and demand curves - between the equilibrium and the quantity supplied (in this case by the monopoly). In this case, the deadweight loss is at the expense of consumer surplus, making C the correct answer. Why is D wrong? First, it just is The equilibrium point is where the supply and demand curves meet. This is NOT affected by monopoly. Monopoly UNDERPRODUCES with respect to that point, but the point itself is just constant. Another way to look at it, if the equilibrium point shifted to match monopolistic output then there’d not be a ‘deadweight loss’ to report since there’d be no difference between the quantity supplies and the new equilibrium. -Ed
Ed, I like your explanation.
D is wrong because monopoly still produce the quantity at MR=MC, but the price is along the demand curve, which i believe is usually higher then the equilibrium but downward sloping Perfect. Comp produce at MR=MC, but MR=Price=Demand simply put. But Monopoly and Perfect. Comp, want to produce at the level where the Marginal benefit(MR) equals the Marginal Cost of producing(MC). Monopoly can price higher price along the demand curve. Perfect Comp, must price at the MR=MC=ATC.
You are right, I misinterpreted the “quantity”.
Equilibrium quantity is a loosely knit term for market efficiency, where marginal benefit equals marginal cost. In a monopoly, output is restricted to where marginal cost equals marginal revenue.