CFA Practice Question

CFA Practice Question

From the viewpoint of allocative efficiency, which of the following is a defect of pure monopoly?

I. A monopolist has little incentive to produce efficiently (at a low cost).
II. The monopolist undersupplies the market and charges too high a price.
III. The monopolist is a revenue maximizer, not a profit maximizer.
A. I and II
B. II only
C. III only
Explanation: The monopolist ensures profits by restricting output.

User Contributed Comments 8

User Comment
shasha production inefficiency is caused by high entry barriers, but not by allocative inefficiency.
ticomico Monopolists are not revenue maximizer. They will produce where MR=MC, only if the ATC line is below that point. Monopolists are profit maximizer.
danlan Monopolist has incentive to produce efficiently, this is related to cost and not price.
MUSK Monopolists DONT produce at the lowest total cost,hence I think A is the correct answer. Can some one please explain?
mrdavis Monopolist has at least some incentive to produce at a low cost as a barrier to entry
Kuki good point mrdavis....didn't think of it that way!thanks!
CFunder Pg. 201 of the text - "Because the monopoly restricts output below the level of perfect competition and faces no competitive threat, it does not produce at the minimum possible long-run average cost. As a result monopoly damages the consumer interest in three ways: It produces less, it increases the cost of production and increases the price to above the cost of production."
JCopeland A is not correct because producing efficently implies that a firm is producing to meet one of 3 objectives profit maximization where MR=MC, Revenue Maximazation where MR=0, or at Average cost minimization where MR=ATC. Each of these outcomes is efficent if it is the objective that a firm chooses given a different set of circumstances for each. A monopoly can produce efficently at MR=MC. Low cost is not a relevant factor in monopoly production.
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