Multiple Choice QuestionIf the objective of government is to achieve allocative efficiency, what kind of price should government establish for the monopolist?Multiple choice question.One that is below its marginal cost.One that is equal to its marginal cost.One that is above its marginal cost.One that is fair to all consumers.
Question
Multiple Choice QuestionIf the objective of government is to achieve allocative efficiency, what kind of price should government establish for the monopolist?Multiple choice question.One that is below its marginal cost.One that is equal to its marginal cost.One that is above its marginal cost.One that is fair to all consumers.
Solution
The correct answer is: One that is equal to its marginal cost.
Here's why:
Allocative efficiency is a state of the economy in which production represents consumer preferences. In particular, it occurs when the price consumers are willing to pay is equal to the marginal cost of production. This means that the last unit of goods produced provides a marginal benefit to consumers equal to the marginal cost of producing.
In a monopoly, the monopolist sets the price above the marginal cost of production, leading to allocative inefficiency. If the government wants to achieve allocative efficiency, it should set the price equal to the marginal cost. This way, the price consumers pay for the last unit of goods equals the cost of producing that last unit, achieving allocative efficiency.
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